1. Impact Of IS& LM Curve in
Indian Economy
By-
Sudarshan Kumar Patel

2. Brief Idea About IS & LM Curve
The IS/LM model (Investment—
Saving / Liquidity preference—
Money supply) is
a macroeconomic tool that
demonstrates the relationship
between interest rates and real
output in the goods and services
market and the money market.

3. Investment—Saving curve
For the Investment—Saving
curve, the independent
variable is the interest rate and
the dependent variable is the
level of income (even though
the interest rate is plotted
vertically).
The IS curve is drawn as
downward-sloping with the
interest rate (i) on the vertical
axis and GDP (gross domestic
product: Y) on the horizontal
axis.

4. Liquidity Preference And Money
Supply Curve
For the Liquidity preference
and Money supply curve, the
independent variable is
"income" and the dependent
variable is "the interest rate."
The LM curve shows the
combinations of interest rates
and levels of real income for
which the money market is in
equilibrium. It is an upward-
sloping curve representing the
role of finance & money

5. IS/LM Model-Impact of Fiscal Policy
 A rise in Government investment
spending, by increasing the
demand for goods at the same
interest rate, has the effect of
pushing the IS curve to the right.
 This in turn increases the
aggregate demand and therefore
the GDP.
 However, interest rates have to
increase so as to equilibrate
between the loanable funds and
liquidity preferences..

6. IS/LM Model-Impact of Monetary Policy
 As the money supply is increased,
the LM curve shifts outward or
downward. This in turn will lower
interest rates, spur investments and
consumption, and raise national
income.
 However, in the long-run,
prices/wages adjust to return the
real money supply curve (and
thereby the LM curve) backwards to
its original position.
 It is inferred that the long-run
impact of any change in monetary
policy is minimal

7. IS/LM Model-Impact of Great Recession
 When the economy is operating
way below its potential output
frontier, large pool of labor
unemployed, and aggregate
demand heavily constrained by
lack of purchasing power, an
increase in money supply is not
going to lead to inflationary
pressures. Also, at the zero-bound,
since cash and bonds become
interchangeable, at the margins,
money is just being held as a store
of value, and changes in the
money supply have no effect.

8. Effect of Fiscal & Monetary Policy
Shift of IS Shift of LM Movement
of Output
Movement
of Interest
Increase In
Taxes
Left None Down Down
Decrease in
taxes
Right None Up Up
Increase in
Spending
Right None Up Up
Decrease in
spending
Left None Down Down
Increase in
money
None Down Up Down
Decrease in
money
None Up Down Up

9. THANK YOU