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September 05, 2006
IS -- the heart of the Keynesian concept
The IS Curve is the element common to all the Keynesian models. It establishes the role of the interest rate in determining the level of output.
Economics lectures typically reflect decades of refinement in presentation. Students are often shown the best presentation without even a mention of alternatives.
For example, if the quantity demanded is a function of price and income, there are two ways to depict that function on a two-dimensional blackboard. On the left is the standard demand curve, which shifts when income changes. On the right is a graph of quanity vs. income, which shifts when the price changes. The alternative on the left is preferred for a variety of reasons, but depicting any function with two arguments presents a similar choice.
This point is relevant here because the Simple Keynesian Model and the IS Curve bear a similar relationship. We consider these in turn.
The Simple Keynesian Model
Step 1
Step 2
An algebraic view
Derive an IS Curve from the Simple Keynesian Model
Derive an IS Curve from the supply and demand for loanable funds
Conclusion
Posted by bparke at September 5, 2006 02:39 AM