IS-LM Model

Discipline: Economics

Developed by English economist John Hicks (1904-1989) and American economist Alvin Hansen (1887-1975) to provide a framework for analyzing the factors determining the level of aggregate demand.

IS-LM model (also known as the Hicks-Hansen model) was adopted as a universal framework in studying macroeconomics because it seemed to incorporate different views of the working of the economy. It combines equilibria in the financial market with equilibria in the goods and services market, establishing an equilibrium level for demand.

The framework represents investment-savings (IS) and the liquidity-money supply (LM), and can be used to illustrate how fiscal and monetary policies are employed to alter national income.

J Hicks, 'Mr. Keynes and the Classics: A Suggested Interpretation', Econometrica, vol. v (April, 1937), 147-59;
J Dupuit, On the Measurement of the Utility of Public Works (Paris, 1844);
J R Hicks, 'The Four Consumers' Surpluses', Review of Economic Studies, vol. xi (1943), 31-41;
J F Muth, 'Rational Expectations and the Theory of Price Movements', Econometrica, vol. XXIX, 3 (1961), 315-35


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