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The IS-LM models are used to get the equilibrium in the economy between interest rates and money.
In macroeconomics, investment is determined by the number of goods purchased during a period and not consumed at the same time.
If investment increases, the rate decline. Saving shows earnings are not spent and it is rewarded with interest or dividend.
IS-LM was introduced for the goods market in 1930 showing the relationship between savings and money.
It shows interest rates fall when people spend on long-lasting goods, cars, and types of equipment, and it may support GDP growth but lead to less personal savings.
The LM is for the money market, funds, and the movement of cash into long-term instruments, and IS is for the impact of expanding the economy.
At one point the two curves meet creating an economic equilibrium. The central banks can shift the curve by printing more money but it can lead to a higher rate of inflation.
The tool uses simplistic correlations to get results that may not be applicable for advanced economies involving factors like the relation between marketing and finance, global trade investment, relative valuation, and demand.
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