April 08, 2004
The Keynesian IS/LM Model
The IS/LM Model links the long-term interest rate, the short-term interest rate, and the level of output, which equals income. This model improves on the Simple Keynesian Model by making explicit the role of the long-term interest rate in determining the level of investment.
Shown is a business cycle caused by a shock to investment. Please note that, due to time considerations, we did not finish the analysis by showing the changes in the right-hand diagram caused by the changes in the interest rate and income.