The Keynesian IS/LM Model explains how the economy can be in equilibrium even with unemployment in the labor market.  There are two versions of this story in this application.

Model Link:  IS/LM Basics
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Printable PDF Exercises

The IS/LM Basics application shows you how to derive the IS and LM curves and how to do the basic short-run analysis of monetary and fiscal policy assuming a fixed price level.  The steps involved are:

• Derive IS Curve
• Derive LM Curve
• Monetary Policy
• Fiscal Policy (See the EconModel instructions to the right and one of the resulting graphics below.)

The following movie is a brief excerpt from the IS/LM Basics application.

Movie:  Basic Monetary and Fiscal Policy Analysis
              (2 min, 43 seconds)

The Aggregate Supply / Aggregate Demand extension adds to the analysis an AS/AD diagram that accommodates analysis of a flexible price level.  You can then trace out the short-run and long-run implications of monetary and fiscal policy. 

Model Link:  Aggregate Supply / Aggregate Demand
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Printable PDF Exercises

The steps involved are:

• Derive Aggregate Demand Curve
• Fiscal Policy, Short-Run and Long-Run
• Monetary Policy, Short-Run and Long-Run

You might also be interested in the Animated Phillips Curve Diagram.  The original pre-1969 Phillips Curve appeared to support the idea that there was a stable tradeoff between inflation and unemployment, and this stylized fact was taken to support a Keynesian view of the economy.

Classic Economic Models

    Contents

Macroeconomics

Introduction
    Overview of Macro Models

Models in Chronological Order
    The Classical Model
    The Simple Keynesian Model
    The Keynesian IS/LM Model
    The Mundell-Fleming Model
    Real Business Cycles
    The IS/MP Model
    The Solow Growth Model

Financial Markets
    Utility-Based Valuation of Risk
    Mean-Variance Analysis:
        Risk vs. Expected Return
    Fixed Income Securities:
        Mortgage/Bond Calculator
    Growth Investments:
        Present Value Calculator

Microeconomics

Introduction
    Overview of Micro Models

Supply and Demand
    Basic Supply and Demand
    Who Pays a Sales Tax?
    The Cobweb Model and
        Inventory-Based Pricing

Theory of the Firm
    Perfect Competition
    Monopoly and
        Monopolistic Competition
    Price Discrimination
    The Demand for Labor

Theory of the Consumer
    Two Goods - Two Prices
    Intertemporal Substitution
    Labor Supply, Income Taxes,
        and Transfer Payments

Resources