IS-LM Model : goods and 
services market and money
market

It works for a closed economy. 
So we don’t take into 
consideration the exports(x) 
and imports (m)

Short run = prices and wages 
are given, market structure 
is given, capital stock is 
constant

The IS curve shows the
equilibrium of the goods
and services markets depending
on level of interest rates 
and income (output = Y = GDP). 
The IS curve slopes downward 
because lower interests rates
tends to increase investments
leading to a higher income (Y)

The equation is : Y = C(Y-T) + 
I(Y+i) + G

Consumption is a depends on
the dispensable income 
(income - taxes)

Investment depends on 
the income and interest
rates : lower interest rates
leads to invest more which 
leads to a higher income



The LM curve shows the 
equilibrium of the money 
market, where MD = MS,
depending of the level
of interest rates and income(Y)
The LM curve slopes 
upward because higher income
= increase money demand = 
increase interest rates