2. IS - LM Relation 1) IS Relation It is more realistic to assume that investment spending (/) depends primarily on two factors. The level of sales (+) The interest rate (-) Therefore, I = I(Y, r). Taking into account the investment relation, the equilibrium condition in the goods market becomes: Y = C(YD) +I(Y,r) + G This equilibrium in the goods market is known as the IS relation. 2) LM Relation The money market is said to be in equilibrium when real money supply (M/P)s equals real money demand (M/ . The supply of money is assumed to be set by the central bank at some fixed level, (M/P)s'. . What is the demand for money