What does the IS-LM model primarily illustrate?

The IS-LM model primarily illustrates the relationship between interest rates and total output in an economy. It provides a framework for understanding how the goods market (IS curve) and the money market (LM curve) interact to determine the equilibrium levels of output (aggregate demand) and interest rates.

The IS curve shows the combinations of interest rates and output where the goods market is in equilibrium, meaning that total spending (consumption + investment + government spending + net exports) equals total output. As interest rates decrease, investment and consumption generally increase, leading to a higher level of output.

Conversely, the LM curve represents the equilibrium in the money market, where the supply of money meets the demand for money. This relationship implies that changes in output can affect the demand for money, which, together with the money supply, determines interest rates.

As output increases, the demand for money also increases, leading to changes in the interest rate based on the intersection of the IS and LM curves. Therefore, the IS-LM model effectively captures how shifts in either curve can influence both the level of output and the interest rates within an economy, making answer choice B accurate in highlighting this dynamic.

The other choices focus on different aspects of macroeconomic theory but do not