Editing IS–LM model (section)

{{Short description|Macroeconomic model relating interest rates and asset market}}
[[File:Islm.svg|class=skin-invert-image|thumb|270px|The IS curve moves to the right, causing higher interest rates (i) and expansion in the "real" economy (real GDP, or Y)]]{{Macroeconomics sidebar}}
The '''IS–LM model''', or '''Hicks–Hansen model''', is a  two-dimensional [[macroeconomic model]] which is used as a pedagogical tool in macroeconomic teaching. The IS–LM model shows the relationship between [[interest rate]]s and [[Output (economics)|output]] in the short run in a [[closed economy]]. The intersection of the "[[Investment (macroeconomics)|investment]]–[[National saving|saving]]" (IS) and "[[liquidity preference]]–[[money supply]]" (LM) curves illustrates a "[[General equilibrium theory|general equilibrium]]" where supposed simultaneous equilibria occur in both the goods and the money markets. The IS–LM model shows the importance of various [[demand shock]]s (including the effects of [[monetary policy]] and [[fiscal policy]]) on output and consequently offers an explanation of changes in [[national income]] in the short run when [[price level|prices]] are fixed or [[Nominal rigidity|sticky]].  Hence, the model can be used as a tool to suggest potential levels for appropriate stabilisation policies. It is also used as a building block for the demand side of the economy in more comprehensive models like the [[AD–AS model]].

The model was developed by [[John Hicks]] in 1937 and was later extended by [[Alvin Hansen]] as a mathematical representation of [[Keynesian economics|Keynesian macroeconomic theory]]. Between the 1940s and mid-1970s, it was the leading framework of macroeconomic analysis. Today, it is generally accepted as being imperfect and is largely absent from teaching at advanced economic levels and from macroeconomic research, but it is still an important pedagogical introductory tool in most undergraduate macroeconomics textbooks. 

As monetary policy since the 1980s and 1990s generally does not try to target money supply as assumed in the original IS–LM model, but instead targets interest rate levels directly, some modern versions of the model have changed the interpretation (and in some cases even the name) of the LM curve, presenting it instead simply as a horizontal line showing the central bank's choice of interest rate. This allows for a simpler dynamic adjustment and supposedly reflects the behaviour of actual contemporary central banks more closely.