Editing IS–LM model (section)

==Shifts==
One hypothesis is that a government's [[deficit spending]] ("[[fiscal policy]]") has an effect similar to that of a lower saving rate or increased private fixed investment, increasing the amount of demand for goods at each individual interest rate. An increased deficit by the national government shifts the IS curve to the right.  This raises the equilibrium interest rate (from i<sub>1</sub> to i<sub>2</sub>) and national income (from Y<sub>1</sub> to Y<sub>2</sub>), as shown in the graph above.  The equilibrium level of national income in the IS–LM diagram is referred to as [[aggregate demand]].

Keynesians argue spending may actually "crowd in" (encourage) private fixed investment via the [[accelerator effect]], which helps long-term growth. Further, if government deficits are spent on productive public investment (e.g., infrastructure or public health) that spending directly and eventually raises potential output, although not necessarily more (or less) than the lost private investment might have. The extent of any crowding out depends on the shape of the LM curve.  A shift in the IS curve along a relatively flat LM curve can increase output substantially with little change in the interest rate. On the other hand, a rightward shift in the IS curve along a vertical LM curve will lead to higher interest rates, but no change in output (this case represents the "[[Treasury view]]").

Rightward shifts of the IS curve also result from [[exogeny|exogenous]] increases in investment spending (i.e., for reasons other than interest rates or income), in consumer spending, and in export spending by people outside the economy being modelled, as well as by exogenous decreases in spending on imports.  Thus these too raise both equilibrium income and the equilibrium interest rate.  Of course, changes in these variables in the opposite direction shift the IS curve in the opposite direction.

The IS–LM model also allows for the role of [[monetary policy]]. If the money supply is increased, that shifts the LM curve downward or to the right, lowering interest rates and raising equilibrium national income.  Further, exogenous decreases in liquidity preference, perhaps due to improved transactions technologies, lead to downward shifts of the LM curve and thus increases in income and decreases in interest rates. Changes in these variables in the opposite direction shift the LM curve in the opposite direction.