IS/LM oudated and flawed ?

You haven't understood what I have said. This is not what I was saying.



This is like saying a supply curve plots the relationship between price and quantity, so a correlation exists. Yes - a positive correlation.

But also, a demand curve plots the relationship between price and quantity, so a correlation exists. This time it is a negative correlation.

When there is a correlation like this, for every value of one variable there exists a unique value of the other variable, and the correlation allows you to work that out. So in supply where there is a positive correlation, for every P there is an associated Q, and Q rises as P rises. With demand there is a negative correlation, so for every P there is an associated Q but Q falls as P rises. So when you are looking at an interaction between supply and demand, there will be one unique P,Q combination that satisfies both. This is equilibrium.

The ISLM is the same principle.

IS is going from i to Y. It tells you that as i increases, investment will fall, and as investment influences Y, as i increases, Y falls. So it is downward sloping like a demand curve.

LM is going from Y to i. It tells you that as Y increases, demand for money increases, and so in the absence of changes in money supply, the interest rate that brings the supply and demand of money into equilibrium increases. So as Y increases, i increases. Hence it is upward sloping like a supply curve.

At every value of i, there exists a corresponding value of Y that satisfies equilibrium in the goods market, because investment is usually financed by borrowing and lower interest rates create more investment. That set of equilibriums runs all the way along the IS curve.

At every value of Y, there exists a corresponding value of i that satisfies equilibrium in the supply and demand for money. That set of equilibriums runs all the way along the LM curve.

The goods market and money market will come into equilibrium simultaneously at a unique i,Y combination, just like demand and supply will come into equilibrium at a unique P,Q combination.

Then in the same way as exogenous shifts in demand or supply curves will change that equilibrium point, exogenous shifts in the IS or LM curves will change the equilibrium in the ISLM model.