This occurs when two, or more than two, signals are in the same unit simultaneously (as is nearly always the case with audio).

What happens is that when two waves of different frequencies are present sum and difference frequencies will result.

e.g.

f1 = 1000 Hz and f2 = 1100 Hz which can yield f1 - f2 = 100 Hz, and f1 + f2 = 2100 Hz etc etc .. .. ..

All analogue systems have IM figures, and it sounds ugly as it has no musical relationship.

Check recommended reading for this section.
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Recording Studio Suntans