Evidence and data
Read the graph as a fixed-price short-run equilibrium map. Use GDP, investment, money-market rates, and money-demand evidence only as checks on the diagram, not as direct estimates of the two curves.
Calibration or measurement
Slope parameters are teaching parameters. They represent interest sensitivity and money-demand sensitivity, not estimated structural constants.
Boundaries
- No price adjustment or inflation dynamics.
- Weak for liquidity-trap, credit-rationing, and open-economy questions.
- Static comparative statics, not a time path.
Use guidance
- When sufficient
- Short-run output and interest-rate responses to demand or money-supply changes when the price level is fixed and the central bank is not at the zero lower bound. Comparative statics on a stylized closed economy.
- When sketch only
- Use as a teaching diagram for the interaction between goods and money markets. Do not use to predict the size or timing of a real-economy response; the slopes are not estimated parameters.
- When to switch
- Switch to a New Keynesian model (theoretical:new-keynesian-phillips or DSGE NK) when the question requires endogenous prices, expectations, or a forward-looking transmission of policy.
- Falsification signal
- A monetary expansion that depresses the policy rate AND lowers output simultaneously falsifies the IS-LM mapping. Such episodes (e.g., a credit-channel-driven recession after a rate cut) need a model with financial frictions.