EconixaECONOMICS FUNDAMENTALS

Interactive simulator

IS-LM Model Explorer

The IS curve shows goods-market equilibrium (lower interest rates raise investment and output); the LM curve shows money-market equilibrium (higher output raises money demand and interest rates). This explorer lets you shift IS with fiscal policy and LM with monetary policy, tracing how interest rates and output move — and why fiscal expansion can crowd out private investment.

050100150200250300-5%0%5%10%Output YInterest rate rISLME (Y*=178, r*=1.11%)
IS: r = 10 − 0.05Y + 0.0LM: r = −6 + 0.04Y − 0.0Equilibrium output Y* = 177.78Equilibrium interest rate r* = 1.11%
Reading the model

IS shows goods-market equilibrium (higher r cuts investment, so lower Y). LM shows money-market equilibrium (higher Y raises money demand, so higher r). Expansionary fiscal policy shifts IS right — output rises and rates rise. Expansionary monetary policy shifts LM right — output rises and rates fall. Solve 10 − 0.05Y + f = −6 + 0.04Y − m for the equilibrium above.

How to use it

  1. Shift IS right to model a government spending increase.

  2. Shift LM right to model an increase in the money supply.

  3. Read the new interest rate and output at the intersection.

  4. Compare the output gain with and without the interest-rate response.

What you will learn

  • Explain what the IS and LM curves represent.
  • Predict the effects of fiscal and monetary policy.
  • Explain crowding out.

Model notes

Fixed prices and a closed economy are assumed; expectations and the financial accelerator are omitted. The IS-LM model is a teaching device whose modern use is debated.