<p>The best economic models make useful predictions with as little complexity as possible -- in other words, they make assumptions that aren't "true" in the real world, but make predictions that nevertheless turn out to be true.</p>

<p>For instance, advocates of the day-to-day use of the IS-LM model such as Paul Krugman point to the analysis of liquidity traps as an important case where its users have proved to be right where many other analysts have made bad predictions.</p>

<p>From "<a href="https://krugman.blogs.nytimes.com/2014/03/28/what-i-mean-when-i-talk-about-is-lm-wonkish/" rel="nofollow noreferrer">What I Mean When I Talk About IS-LM (Wonkish)</a>":</p>

<blockquote>
  <p>Those of us who understood IS-LM and took it seriously declared <em>in advance</em> — in late 2008 and early 2009 — that big deficits and huge increases in the monetary base would lead neither to soaring interest rates nor to soaring inflation. This was very much not what many influential people were saying: there were widespread forecasts of <a href="https://krugman.blogs.nytimes.com/2009/05/02/liquidity-preference-loanable-funds-and-niall-ferguson-wonkish/" rel="nofollow noreferrer">soaring rates</a> and <a href="https://www.ft.com/intl/cms/s/0/ae436dbc-2d09-11de-8710-00144feabdc0.html?siteedition=intl#axzz2xIgWBnXy" rel="nofollow noreferrer">soaring inflation</a>. Later, there were <a href="https://krugman.blogs.nytimes.com/2013/05/03/playing-whack-a-mole-with-expansionary-austerity/" rel="nofollow noreferrer">many people denying</a> that austerity would have negative effects on output.</p>
</blockquote>

<p>He provides <a href="https://krugman.blogs.nytimes.com/2011/10/09/is-lmentary/" rel="nofollow noreferrer">a more detailed explanation</a> of an IS-LM analysis of liquidity traps (and a few other insights that the model provides).</p>

CC BY-SA 4.0
2018-12-06T16:59:26.573Z
2018-12-06T16:59:26.573Z
Dan
<p>Two vies on IS-LM, Keynesian and Monetarist, analyses extreme situations of the economy. It provides comparative-static equilibrium condition. It ignores time-lags. It doesn't consider effects of changes in aggregate demand on output and prices. </p>

<p>Keynesian version assumes price level to be constant and inflation ignored. Neoclassical version considers full-employment and so price level is result of nominal money supply and output is exogenous. </p>

CC BY-SA 4.0
2018-07-09T14:10:51.870Z
2018-07-09T14:10:51.870Z
Abhinav
<p>Advantages:</p>

<ol>
<li>Large enconomy</li>
<li>National level problems</li>
<li>Calculate national income</li>
<li>Less assumptions</li>
<li>Working of economic market</li>
</ol>

<p>Disadvantages:</p>

<ol>
<li>Ignorance of individual units</li>
<li>Incomplete records</li>
<li>Less exact results</li>
<li>No individual approach</li>
</ol>

CC BY-SA 4.0
2018-12-11T15:31:54.047Z
2019-05-11T17:06:09.710Z
2019-05-11T17:06:09.710Z
VIPUL M SADRANI
<p>How does the IS-LM model help economists in the day to day analysis of the economy? There are just too many assumptions that are not there in the real world.</p>

CC BY-SA 3.0
2016-11-02T20:34:58.577Z
IS-LM is not used in day to day analysis. In fact very few models are.
Giskard
CC BY-SA 3.0
2016-11-07T00:59:04.543Z
A decent answer could still be reasonably succinct here. Many questions on this SE could discussed at length but a short answer + suggestion for further reading is suitable. I think this is one. @KennyLJ
Jamzy
CC BY-SA 4.0
2018-08-08T17:56:25.477Z
@denesp That is not true- the IS-LM and Mundell-Fleming type model is used by many central banks and organizations, as are DSGE models.
ChinG
CC BY-SA 4.0
2018-08-08T22:22:14.617Z
@ChinG X "type model" and X "model" are not the same. I am very happy to learn that central banks use more sophisticated models and not base IS-LM.
Giskard
CC BY-SA 4.0
2018-08-09T13:57:01.063Z
@denesp indeed you are right
ChinG
<macroeconomics><financial-markets>
What are the advantages and disadvantages of the IS LM model?
MTK
# What are the advantages and disadvantages of the IS LM model?

(Asked by: username_0 on 2016-11-02)

How does the IS-LM model help economists in the day to day analysis of the economy? There are just too many assumptions that are not there in the real world.

**Tags:** macroeconomics, financial-markets

> **Comments:**
> **username_1**: IS-LM is not used in day to day analysis. In fact very few models are.  
> **username_2**: A decent answer could still be reasonably succinct here. Many questions on this SE could discussed at length but a short answer + suggestion for further reading is suitable. I think this is one. @KennyLJ  
> **username_3**: @denesp That is not true- the IS-LM and Mundell-Fleming type model is used by many central banks and organizations, as are DSGE models.  
> **username_1**: @username_3 X "type model" and X "model" are not the same. I am very happy to learn that central banks use more sophisticated models and not base IS-LM.  
> **username_3**: @denesp indeed you are right  

---

## 3 answers

### Answer by username_4 on 2018-12-06. Score: 1

The best economic models make useful predictions with as little complexity as possible -- in other words, they make assumptions that aren't "true" in the real world, but make predictions that nevertheless turn out to be true.

For instance, advocates of the day-to-day use of the IS-LM model such as Paul Krugman point to the analysis of liquidity traps as an important case where its users have proved to be right where many other analysts have made bad predictions.

From "[What I Mean When I Talk About IS-LM (Wonkish)](https://krugman.blogs.nytimes.com/2014/03/28/what-i-mean-when-i-talk-about-is-lm-wonkish/)":

> Those of us who understood IS-LM and took it seriously declared *in advance* — in late 2008 and early 2009 — that big deficits and huge increases in the monetary base would lead neither to soaring interest rates nor to soaring inflation. This was very much not what many influential people were saying: there were widespread forecasts of [soaring rates](https://krugman.blogs.nytimes.com/2009/05/02/liquidity-preference-loanable-funds-and-niall-ferguson-wonkish/) and [soaring inflation](https://www.ft.com/intl/cms/s/0/ae436dbc-2d09-11de-8710-00144feabdc0.html?siteedition=intl#axzz2xIgWBnXy). Later, there were [many people denying](https://krugman.blogs.nytimes.com/2013/05/03/playing-whack-a-mole-with-expansionary-austerity/) that austerity would have negative effects on output.

He provides [a more detailed explanation](https://krugman.blogs.nytimes.com/2011/10/09/is-lmentary/) of an IS-LM analysis of liquidity traps (and a few other insights that the model provides).


---

### Answer by username_5 on 2018-07-09. Score: 0

Two vies on IS-LM, Keynesian and Monetarist, analyses extreme situations of the economy. It provides comparative-static equilibrium condition. It ignores time-lags. It doesn't consider effects of changes in aggregate demand on output and prices.

Keynesian version assumes price level to be constant and inflation ignored. Neoclassical version considers full-employment and so price level is result of nominal money supply and output is exogenous.


---

### Answer by username_6 on 2018-12-11. Score: -2

Advantages:

1. Large enconomy
2. National level problems
3. Calculate national income
4. Less assumptions
5. Working of economic market

Disadvantages:

1. Ignorance of individual units
2. Incomplete records
3. Less exact results
4. No individual approach


---

