Chapter 21: The IS-LM Model

The IS-LM model is a tool that shows the relationship between investments and savings and liquidity preference and the money supply. It is meant to illustrate the way in which the demand for goods and money are related to inflation, interest, and taxes.

Some of the basic principles this model accounts for are:

• Consumers' decision to spend is influenced by the cost of goods. When prices are expected to rise, they are motivated to buy sooner rather than later.
• Consumers' decision to save is influenced by the interest they will earn. The more interest they earn, the more money they will save, deferring their purchases until later.
• Investors are motivated by the desire to earn profits safely. They would rather have the certainty of holding a bond than engage in the risk of funding production, unless there is sufficient additional reward for investing in production.
• Domestic production is influenced by the money supply. When money is strong it is cheaper for consumers to buy imported goods, decreasing demand for domestic ones, decreasing production. When money is weak, producers can create more goods for export.

(EN: Much of this chapter seems vague and there's a great deal of emphasis on how to work the equations without much reference to what they mean, which all seems a bit academic to me, so there aren't many notes here.)