ISLM

Horizontal Axis

National Income or real gdp

Labeled y

Vertical axis

Interest rate

Labeled r

IS curve shifts to the left

Increase in taxes

IS curve shift to the right

Government spending increased

IS curve shift to the right

Consumer confidence fell?

IS curve shift to the right

• Business optimism about future profits improved?

increase in income

increases the demand for money

Given the money supply, this leads to an increase in the equilibrium interest rate.

Equilibrium in financial markets

implies that an increase in income leads to an increase in the interest rate. The LM curve is upward-sloping.

Equilibrium in goods market

implies that an increase in the interest rate leads to a decrease in output.

ISLM equilibrium

When IS and LM curve intersect

Increase in government purchases

• raises the level of
  income at any given interest rate.

Decrease in taxes

• encourages consumers to spend more and, therefore, increases expenditure.

Increase in money

• leads to an increase in real money, this
  balances M/P because the price level P is fixed in the short run.