Analysis Of The Keynes' Economic Equilibrium From The Is-Lm Model Perspective

In a first phase, during the Great Depression, historical events favored Keynesian interpretation of the scarce aggregate demand theory and of the necessity for a demand management through a state intervention mechanism in order to stabilize the economy. Therefore, economists were ready for a different model and they paid attention to a new and more plausible perspective than the laissez-faire theory. In the late '30s, Hicks and Hansen were researching the possibility of obtaining a simultaneous equilibrium situation on the goods market and on the money market, which lead to the IS - LM equilibrium model. This model allowed the first precise formulation of a set macroeconomic policy proposals, as the budget policy acts on the IS curve, and the monetary policy acts on LM curve. This paper addresses the problem of achieving a combined equilibrium of the markets in terms of the IS-LM model. Thus, John Hicks and Alvin Hansen developed a new model using the Keynesian macroeconomic theory, and the IS-LM is of great importance for the general equilibrium theory especially in the current economic situation.