Two Blades are Better than One: The Role of IS-LM
IS–LM analysis is an important tool that acknowledges the fact that for equilibrium to prevail in an economy it is necessary to have equilibrium in both the goods and the money markets simultaneously. To avoid undue complexity, equilibrium in each market is presented separately and then combined for the final analysis. Both markets rely on the interest rate to provide necessary signals for investment and lending decisions.
Definition
The IS schedule is the loci of interest rate-output sets for which the goods market is in equilibrium.
Definition
The LM schedule is the loci of combinations of interest rates and incomes that result in equilibrium in the money market.
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