Two interpretations of the IS-LM model are that the model explains:
A) the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve.
B) the short-run quantity theory of income, or the short-run Fisher effect.
C) the determination of investment and saving, or what shifts the liquidity preference schedule.
D) changes in government spending and taxes, or the determination of the supply of real money balances.

Question

Quizplus · Accepted Answer

The IS-LM model explains the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve. This is reflected in the IS curve representing equilibrium in the goods market and the LM curve representing equilibrium in the money market. Together, they determine the short-run equilibrium level of income and interest rate.

Answer: C 
 The IS-LM model also explains the determination of investment and saving, or what shifts the liquidity preference schedule. This is reflected in the LM curve, which shows the equilibrium level of real money balances for a given interest rate. The liquidity preference schedule shifts when there is a change in income or when there is a change in expectations about future interest rates or inflation.

Two Interpretations of the IS-LM Model Are That the Model