The IS–LM model, or Hicks–Hansen model, is a macroeconomic tool that shows the relationship between interest rates (ordinate) and assets market
Let me simplify, the green lines are loans the orange line is deposits, the vertical axis is interest charges.
The, incorrect, way they explain central banking is that a deposit instrument is created for every loan instrument. But the ISLM model shows independent movement between loans and deposits.
Definitions:
The ISLM model called LM the liquidity market, they mean money market. IS is really that same money market in the simplified version, IS is the loan queue, LM the deposit queue. The market maker keeps the two queues tracking each other. This model is simpler, and the math works all the way through. I dumped time, we are not doing 'rates'.
The horizontal axis is really NGDP.
Wait, all loans get redeposited at the sign up. Except the shadow bankers and borrower has been adjusting deposits in a hedge up to the point of the loan. Traders work around the fake loans=deposits formula, they know insider information is being priced.
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