Macroeconomics · Interactive
IS–LM: fiscal and monetary shocks
Government spending shifts one curve. The money supply shifts the other. Move either, and watch output and the interest rate settle somewhere new, then freeze the old equilibrium to see the shift itself.
Y* 49 · r* 4.20
IS (goods market)LM (money market)Equilibrium
The maths, with your numbers
Goods market (IS)Y = m(A₀ + G) − brY = 2(25 + 8) − 4.00r
Money market (LM)M/P = kₗY − hr12 = 0.5Y − 3.00r
Equilibrium outputY* = [h·m(A₀+G) + bMₛ] / (h + bkₗ)49
Equilibrium interest rater* = (kₗY* − Mₛ) / h4.20
Reading the diagram
What moves, and why
A fiscal shock shifts IS
More government spending shifts the IS curve right. Output rises, but so does the interest rate, and that higher rate crowds out some private investment. The multiplier's full effect rarely survives all the way to output.
A monetary shock shifts LM
More money in the system shifts the LM curve right. Output rises and the interest rate falls, since cheaper borrowing draws out more investment along the IS curve.
The slopes decide who wins
A flat LM (high h) or a steep IS (low b) hands fiscal policy the win, with almost no crowding out. These are the liquidity trap and the investment trap. A steep LM or a flat IS does the opposite: fiscal spending gets fully crowded out and monetary policy does all the work.
Try it on real questions
From CUET-PG, GATE and IIT JAM
Five questions on exactly this: what shifts which curve, and what a liquidity trap does to fiscal and monetary policy.
These are questions from the TestStop bank. A free account answers 10 a day, each with its worked solution; All-Access opens every set with no daily limit.
Read next
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