what is the is lm model 
the is lm model which stands for investment saving is and liquidity preference money supply lm is a keynesian macroeconomic model that shows how the market for economic goods interacts with the loanable funds market or money market it is represented as a graph in which the is and lm curves intersect to show the short run equilibrium between interest rates and output understanding the is lm modelbritish economist john hicks first introduced the is lm model in 1937 not long after fellow british economist john maynard keynes published the general theory of employment interest and money in 1936 hicks model served as a formalized graphical representation of keynes theories though it is used mainly as a heuristic device today 123the three critical exogenous or external variables in the is lm model are liquidity investment and consumption according to the theory liquidity is determined by the size and velocity of the money supply the levels of investment and consumption are determined by the marginal decisions of individual actors 4the is lm graph examines the relationship between output or gross domestic product gdp and interest rates the entire economy is boiled down to just two markets output and money and their respective supply and demand characteristics push the economy toward an equilibrium point characteristics of the is lm graphthe is lm graph consists of two curves is and lm gdp is placed on the horizontal axis increasing to the right the interest rate makes up the vertical axis 5the is curve depicts the set of all levels of interest rates and output gdp at which total investment i equals total saving s at lower interest rates investment is higher which translates into more total output gdp so the is curve slopes downward and to the right 3the lm curve depicts the set of all levels of income gdp and interest rates at which money supply equals money liquidity demand the lm curve slopes upward because higher levels of income gdp induce increased demand to hold money balances for transactions which requires a higher interest rate to keep money supply and liquidity demand in equilibrium 5the intersection of the is and lm curves shows the equilibrium point of interest rates and output when money markets and the real economy are in balance 3 multiple scenarios or points in time may be represented by adding additional is and lm curves in some versions of the graph curves display limited convexity or concavity shifts in the position and shape of the is and lm curves representing changing preferences for liquidity investment and consumption alter the equilibrium levels of income and interest rates limitations of the is lm modelmany economists including many keynesians object to the is lm model for its simplistic and unrealistic assumptions about the macroeconomy it cannot account for simultaneous high unemployment and inflation in the economy it is also undercut by the change by central banks to using an interest rate rule rather than targeting the money supply 5even hicks later admitted that the model s flaws were fatal and it was probably best used as a classroom gadget to be superseded later on by something better 6 subsequent revisions have taken place for so called new or optimized is lm frameworks 5the model is a limited policy tool as it cannot explain how tax or spending policies should be formulated with any specificity this significantly limits its functional appeal it has very little to say about inflation rational expectations or international markets although later models do attempt to incorporate these ideas the model also ignores the formation of capital and labor productivity 