A Technical Note on the Is\Lm and As\Ad Models

Abstract

This technical note introduces the basic structure of the IS\LM and AS\AD models for a closed economy (i.e., one that does not engage in international trade). It is a useful complement for the more in-depth presentation of these models commonly found in an economics textbook.

Excerpt

UVA-F-1541

Sept. 25, 2008

A Technical Note on the IS\LM and AS\AD Models

Making reasoned judgments about the effects of global events or policy shocks on the economy is important for firms, but is fraught with opportunities for logical missteps. The IS\LM model is a tool for thinking about key relationships in the economy while avoiding the missteps that often arise in macroeconomic analysis. The challenge of macroeconomic analysis is to coherently explain the interrelationships among a multitude of markets while respecting the complexity of those interrelationships and the behaviors that produce them. Microeconomics focuses on variables such as price and quantity in the market for a single good or service. Macroeconomics seeks to explain movements in and relationships among aggregate variables, such as national income, the real interest rate, the level of unemployment, and the rate of inflation.

This technical note introduces the basic structure of the IS\LM and AS\AD models for a closed economy (i.e., one that does not engage in international trade). It is a useful complement for the more in-depth presentation of these models commonly found in an economics textbook. This note is designed for use in the early stages of a general macroeconomics course. As you grow more comfortable with these two models, it will be possible to integrate them to analyze the global macroeconomy.

History, Purpose, and Scope

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Keywords: macroeconomics money market aggregate demand supply curve