Goods market meets money market: fiscal and monetary policy in one diagram.
Warming up the engine…
A two-market model of the short run: the IS curve collects all goods-market equilibria (investment = saving) and the LM curve all money-market equilibria; their crossing pins down output and the interest rate simultaneously.
IS: Y = C(Y-T) + I(r) + G ; LM: M/P = L(r, Y)
Fiscal policy shifts IS: more government spending raises output but also interest rates, so some investment is crowded out. Monetary policy shifts LM: more money lowers rates and raises output. The model's power is showing the policy MIX: the same output level can come with high G and high r, or easy money and low r.
Say which curve shifts and why, then read off BOTH the output and interest-rate effects. Fiscal expansion raising r (crowding out) is the detail markers look for.
Now prove you have it
Move the curve to where you think it lands, and get told exactly which part you got right.
Real-world scenarios on this model
Equilibrium at Y 53, r 4.7.
Equilibrium: Y* = 53.3, r* = 4.7
Current equations
Two markets, one picture. The IS curve collects all the combinations of interest rates and output where the goods market clears (lower rates → more investment → more output). The LM curve does the same for the money market (more output → more money demand → higher rates). Where they cross, both markets clear at once.
Source: Blanchard, Macroeconomics, ch. 5-6