Two curves,
one economy.
The Hicks–Hansen IS–LM model, moved by your fingertips. Watch fiscal and monetary policy shift the curves in real time — and remember what your professor wanted you to feel.
Every (Y, r) that clears the goods market: planned spending equals income. Fiscal policy (G, T) and animal spirits (I0, c) shift it.
Every (Y, r) that clears the money market: money demand equals real money supply. Monetary policy (M) and prices (P) shift it.
Two markets, one equilibrium.
The IS-LM model, first sketched by John Hicks in 1937, compresses Keynes into a single diagram. The IS curve traces every combination of income (Y) and interest rate (r) at which the goods market clears — where planned spending equals output. The LM curve traces every combination where the money market clears — where money demand equals real money supply. The economy sits where the two curves cross: the only point at which both markets are in equilibrium at the same time.
Fiscal policy — a change in government spending G or taxes T — shifts the IS curve. Expansionary fiscal policy pushes IS right, raising both income and the interest rate. Monetary policy — a change in nominal money supply M or the price level P — shifts LM. Expansionary monetary policy pushes LM right, raising income and lowering the rate. The dashed grey lines show the previous equilibrium so you can see the direction and size of the move at a glance.
Sensitivity parameters matter. A steep IS (low interest sensitivity of investment) means monetary policy is weak; a flat LM (high interest sensitivity of money demand — the classic liquidity trap) means the same thing from the other side. Play with these values and the standard textbook results — crowding out, the policy mix, the liquidity trap — appear as visual consequences rather than definitions to memorise.