IS (Interest, Saving) and LM (Liquidity, Money Supply model is an economic model that shows the

**interaction between Goods and Financial Market.**The

**IS curve**is related to the

**Goods Market**and the

**LM curve**is related to the

**Financial Market.**

__IS-LM Model is also known as the Hicks-Hansen Model.__## IS Curve

- With the
**increase in the interest rate in an economy,**people tend to**hold money in the form of Savings**and when the**interest rate declines,**people**spend the money.**Interest/Saving Curve is obtained when the graph of Interest Rate vs GD is plotted as shown below.

- The IS curve is downward sloping because with the
**increases in interest rate,**the level of spending decreases, and the**Savings increase.**Also, with the increase in interest rate, people save more and invest less which leads to a reduction in GDP, hence at high-interest rate savings are high but GDP is low.

## LM Curve

- With the
**Increase in Interest Rate,**people tend to**save/invest****more,**hence the**liquidity in the Financial Market increases,**people buy more and more savings and funds flow in the Financial Market. Interest/Saving Curve is obtained when the graph of Interest Rate vs GD is plotted as shown below. - The LM curve is upward sloping because with the increase in interest rate, the liquidity in financial markets increases, this liquidity is utilized in growth/production-related activities that increase the GDP, hence at high-interest rates both GDP and liquidity are high.

## IS-LM Curve

Upon merging the above two graphs, we get the following graph:- The point of intersection of the IS/LM Curve is the Equilibrium point of Interest Rate and GDP. The intersection of the IS and LM curves shows the
**equilibrium point of interest rates**and output when**money markets and the real economy are in balance.**