does second year economics stack up against reality?

It has always seemed to me that the monetary system of a country is very complex and probably unexplainable by most people. It thus was rather shocking to me to discover the IS/LM model during my economics degree.

The monetary component of the IS/LM is very simple (well, not really, but the way I explain it, it is). It says that there is a nominal money supply which is, more or less, controlled by the central bank. This is closely related to the real money stock if inflation is predictable and low. There is a money demand which is of course determined by the general public. The equilibrium of this market is where the supply and the demand are the same. The cost of money (the price) is the interest payment on bonds (an alternative to money) which the consumer looses by holding money instead of bonds. At equilibrium there is a prevailing interest rate. If the real money stock expands there is now more money available at every interest rate and hence people hold more money. The bond market adjusts to this by lowering the interest rate (the exact interaction is irrelevant because the result is still the same). You can see this in a diagram form below.

I decided to see if this matches the movement of the real life data. I decided to look USA because the Fed (the American central bank) recently had a large cut in interest rates over a short period (just at the end of 2007 and start of 2008) as can be seen in below diagram (Effective Federal Fund Rate). Federal Fund Rate (FFR) is a similar in its function to the interest rate described above, in the monetary component of the IS/LM model.

So, to cut the FFR as was done by the Fed, the above model says that one should see a noticeable increase in the nominal money stock, from January 2008 onwards. The below graphs show what happened to the amount of cash and coins (M0) and M1 (M0 plus money in quick access deposit account, and checkable accounts). As one can see there was indeed an increase in money stock starting from January.

This point to that the monetary component of the IS/LM being a good approximation of reality. However one can be seen from the graphs that there are considerable movements of M0 and M1 not particularly related to the FFR. Clearly the IS/LM still remains very simple and fails to explain everything.

Data sources:

1)M0 data - Fed
2)M1 data - Fed
3)FFR - Federal Reserve Bank of St Louis