The IS-LM model reveals how changes in the money supply affect the equilibrium state of the economy. When expansionary monetary policy is implemented, causing the money supply to increase, the LM curve will shift to the right. This change is manifested as a new equilibrium point in the IS model, in which the significant feature is that the equilibrium interest rate decreases and the equilibrium output increases accordingly.

Under a fixed exchange rate situation, the direct consequence of an increase in money supply is a decline in interest rates, triggering capital outflows. This has led to an increase in national income and an increase in imports, which may lead to oversupply in the local currency market in the short term and put the exchange rate under depreciation pressure. In order to stabilize the exchange rate, the government may need to sell official reserves and reduce the money supply, causing the LM curve to shift back and interest rates and output to return to the original point, indicating that the increase in money supply has not permanently changed the equilibrium state.

Under a floating exchange rate system, the impact of an increase in money supply is more complex. Falling interest rates and capital outflows also occur, but may be accompanied by an increase in exports to compensate for the loss of purchasing power caused by currency depreciation. In this case, although the purchasing power of money weakens, in order to balance the balance of payments, domestic production activities may increase, eventually leading to an increase in equilibrium output, and the equilibrium interest rate may increase due to the increase in investment behavior and the impact of the investment multiplier. .

In general, the IS-LM model provides an in-depth perspective for us to understand how monetary policy affects the economy by analyzing the impact of changes in money supply on interest rates and output. Increased investment further amplifies these effects through a shift in the IS curve.