The IS/MP Model replaces the LM curve in the IS/LM Model with a monetary policy (MP) curve and changes the vertical axis from the nominal interest rate to the real interest rate.  These changes allow the IS/MP Model to focus on monetary policy in terms of the rate of inflation instead of the price level.  (See the references below for a complete description of the model.)

The IS/MP Model application first explains the elements that are new.  These are:

• Monetary Policy (MP) Curve
• Inflation Adjustment (IA) Curve

You can then run either fiscal policy or monetary policy experiments.  The simulations immediately show you the short run effects.  You move forward through time to trace out the long run effects.

The diagrams below are an example of this analysis.

Model Link:  The IS/MP Model
<activate the model links>
Printable PDF Exercises

The IS/MP Model is fairly recent.  The structure is described in David Romer's paper Short-Run Fluctuations, which is available below.  (You will need both documents.)

Paper    Tables

The IS/MP Model presented here follows closely the details in "Keynesian Macroeconomics without the LM Curve," by David Romer in the Journal of Economic Perspectives (Spring, 2000).

These diagrams show the dynamic path the economy follows when the Fed moves to increase the real interest rate in period 2.  By period 10, the economy has returned to nearly the original level of income.  These diagrams are screen shots from the EconModel presentation of the IS/MP Model.

 

 

 

 

 

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