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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.

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    $\begingroup$ IS-LM is not used in day to day analysis. In fact very few models are. $\endgroup$ – Giskard Nov 2 '16 at 20:34
  • $\begingroup$ I voted to close because while this is a perfectly legitimate question, it is not suitable for this site as any decent answer would be too long. See e.g. this 2000 book: IS-LM and Modern Macroeconomics. $\endgroup$ – Kenny LJ Nov 5 '16 at 10:33
  • $\begingroup$ 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 $\endgroup$ – Jamzy Nov 7 '16 at 0:59
  • $\begingroup$ @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. $\endgroup$ – ChinG Aug 8 '18 at 17:56
  • $\begingroup$ @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. $\endgroup$ – Giskard Aug 8 '18 at 22:22
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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)":

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 and soaring inflation. Later, there were many people denying that austerity would have negative effects on output.

He provides a more detailed explanation of an IS-LM analysis of liquidity traps (and a few other insights that the model provides).

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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.

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As stated in this answer, (that I posted in another question earlier today) Modern Monetary Theory (MMT) considers the IS-LM model to be fatally flawed.

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    $\begingroup$ You are not really answering the question and you are linking to your own answer as a kind of source. That is not really useful. The answer you linked to has already been critisized for being one-sided, as seems this answer. $\endgroup$ – redleo85 May 11 at 18:51
  • $\begingroup$ Didn’t mean to mislead as if it’s an independent source. Only intended to not duplicate the answer. Clarifying that the linked answer is mine in the test of this answer. You can certainly disagree with the linked-to answer but it is a well documented and sourced one, and undermines the entire premise of the question. $\endgroup$ – aliteralmind May 11 at 20:26
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    $\begingroup$ "Well sourced" is then, in my opinion, not well enough for this site. You cite two experts from one specific economic spectrum. You could have easily picked two different experts with the opposite opinion. $\endgroup$ – redleo85 May 11 at 20:36
  • $\begingroup$ It is well sourced quotes by an MMT expert and economist, and the very creator of the IS-LM model. That may not be good enough for you, but I’m certainly being accurate with who I’m quoting and sources to verify each one. It is relevant to this discussion. $\endgroup$ – aliteralmind May 11 at 20:40
  • $\begingroup$ You are being accurate with who you quote, but your quotes are very one-sided. E.g. Paul Krugman said the IS-LM Model can be useful in certain circumstances. Furthermore, an answer "the model is crap" is not helpful in a question for advantages and disadvantages of the model. $\endgroup$ – redleo85 May 11 at 20:47
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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
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