Teaching IS-LM macroeconomics through material balance diagrams

Abstract

This study proposes a material balance approach to teaching the IS-LM model. It introduces an easy-to-visualize box diagram approach for representing goods market equilibrium where all the income and expenditure components are simultaneously visible. Similarly, for the money market, it introduces line diagrams to visually represent the demand and exogenous supply of real liquidity. The material balance diagrams can be used to demonstrate shifts in the IS and LM curves, as well as to show the impact of monetary and fiscal policies on all components of the goods and money markets at the same time. The ability to simultaneously depict the interplay of many variables enables these diagrams to overcome the limitations of two-dimensional graphs.