The traditional IS-LM model has been used by macroeconomic textbooks to explain, amongst other things, the level and the changes in the interest rate. According to this paper, this model is irrelevant and inefficient in explaining the positive effect of a greater expected inflation rate, in relation to the nominal interest Rate. In effect, and increase in the nominal rate of interest, that is not accompanied by an increase in real income, supposes according to the IS-LM model, a contraction in the supply of real money balances or opposedly an increase in their demand (in other words, the LM curve would shift to the left, if we employed the usual graphic representation of this basic model, which shows the possible combinations of interest rates and real income, that guarantee equilibrium in the product and money markets). But it would lead nowhere to think that an increase in the expected rate of inflation would imply these alterations in the demand or supply of real money balances. Nevertheless, the author considers this model can be pertinent in explaining other sources of changes in the interest rate.
