Basics of the IS-LM Model

Question 1

What does IS-LM stand for?

Answer 1

Investment-Savings (IS) and Liquidity Preference-Money Supply (LM).

Question 2

What is the IS-LM model used for?

Answer 2

To analyze the interaction between interest rates and output in goods and money markets.

Question 3

What does the IS curve represent?

Answer 3

Equilibrium in the goods market, where savings (S) equal investment (I).

Question 4

What does the LM curve represent?

Answer 4

Equilibrium in the money market, where money demand equals money supply.

Question 5

What are the main variables in the IS-LM model?

Answer 5

Interest rates (r) and national income/output (Y).

Question 6

Who developed the IS-LM model?

Answer 6

John Hicks and Alvin Hansen, based on Keynesian economics.

Question 7

What is the primary assumption of the IS-LM model?

Answer 7

Prices are fixed in the short run, allowing demand fluctuations to impact output.

Question 8

What shifts the IS curve?

Answer 8

Changes in fiscal policy, such as government spending and taxes.

Question 9

What shifts the LM curve?

Answer 9

Changes in monetary policy, such as money supply adjustments.

Question 10

What happens at the intersection of the IS and LM curves?

Answer 10

It represents simultaneous equilibrium in both goods and money markets.