Equilbrium in the Goods Market and Money Market

IS - LM macroeconomic model helps us to develop a sound understanding of how equilbrium is approached in our economy. Here we will understand how equilbrium is acheived in a closed economy.

A macroeconomic model that graphically represents two intersecting curves, called the IS and LM curves. The investment/saving (IS) curve is a variation of the income-expenditure model incorporating market interest rates (demand for this model), while the liquidity preference/money supply equilibrium (LM) curve represents the amount of money available for investing (supply for this model).

The interest rate and the level of output are determined by the interaction of money (LM) and goods (IS) markets. But we should remember that we have adopted few assumptions while developing IS - LM model.

Key Assumptions:

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  Price level is assumed to be constant
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  Firms are willing to supply whatever amount of output is demanded at that price level.
• 
  
  We assumed short rum aggregate supply curve to be flat

We will explain the mathematics behind the model in the subsequent blog.

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