185 summer 2004

The Classical Model

The Keynesian IS/LM Model

Deriving the IS and LM curves:

A collapse in investment caused by lack of "animal spirits" following the stock market crash could have cause the Great Depression.

Bank failures and a falling money supply are also a possible cause.

While a leftward shift in the LM curve leads to an increase in interest rates, this only follows if prices are fixed. In the Great Depression, deflation caused nominal interest rates to head toward zero.