IS Curve vs. LM Curve

Attribute	IS Curve	LM Curve
Definition	Relationship between real output and interest rates in the goods market	Relationship between real output and interest rates in the money market
Shifts	Shifts due to changes in autonomous spending, taxes, or government spending	Shifts due to changes in money supply, money demand, or price level
Vertical/Horizontal	Vertical	Horizontal
Equilibrium	Occurs where planned spending equals real output	Occurs where money supply equals money demand

Introduction

The IS curve and LM curve are two essential concepts in macroeconomics that help us understand the relationship between interest rates and output levels in an economy. Both curves play a crucial role in determining the equilibrium level of income and interest rates in an economy. In this article, we will compare the attributes of the IS curve and LM curve to gain a better understanding of how they interact and influence each other.

IS Curve

The IS curve, short for Investment-Saving curve, represents the equilibrium in the goods market. It shows the combinations of interest rates and output levels where total spending equals total output. The IS curve is downward sloping, indicating that as interest rates decrease, investment increases, leading to higher output levels. The slope of the IS curve is determined by the marginal propensity to consume, the marginal propensity to save, and the multiplier effect.

• The IS curve shifts to the right when there is an increase in government spending or a decrease in taxes, leading to higher output levels at the same interest rate.
• Conversely, a decrease in government spending or an increase in taxes will shift the IS curve to the left, resulting in lower output levels at the same interest rate.

LM Curve

The LM curve, short for Liquidity-Money curve, represents the equilibrium in the money market. It shows the combinations of interest rates and income levels where the demand for money equals the supply of money. The LM curve is upward sloping, indicating that as income levels increase, the demand for money also increases, leading to higher interest rates. The slope of the LM curve is determined by the money supply and the income velocity of money.

• The LM curve shifts to the right when there is an increase in the money supply or a decrease in the income velocity of money, leading to lower interest rates at the same income level.
• On the other hand, a decrease in the money supply or an increase in the income velocity of money will shift the LM curve to the left, resulting in higher interest rates at the same income level.

Comparing IS Curve and LM Curve

While the IS curve focuses on the goods market and the relationship between interest rates and output levels, the LM curve focuses on the money market and the relationship between interest rates and income levels. The IS curve is influenced by factors such as investment, government spending, and taxes, while the LM curve is influenced by factors such as the money supply and the income velocity of money.

• Both curves play a crucial role in determining the equilibrium level of income and interest rates in an economy.
• Changes in fiscal policy, such as government spending and taxes, affect the IS curve, while changes in monetary policy, such as the money supply, affect the LM curve.

Conclusion

In conclusion, the IS curve and LM curve are essential tools in macroeconomics that help us understand the relationship between interest rates, output levels, and income levels in an economy. While the IS curve focuses on the goods market and the relationship between interest rates and output levels, the LM curve focuses on the money market and the relationship between interest rates and income levels. Both curves interact and influence each other, playing a crucial role in determining the equilibrium level of income and interest rates in an economy.