Theory-Based Models
Theory-Based Models
A stripped-down short-run framework for tracing how fiscal demand, liquidity preference, and money-market conditions meet at one output-interest combination.
Variables
Real output in short-run equilibrium.
The interest rate that clears the money market.
Downward-sloping demand equilibrium curve.
Upward-sloping liquidity-money curve.
Assumptions
Prices are fixed in the short run.
The model is about real demand and money-market equilibrium, not inflation adjustment.
The baseline setting is a closed economy.
Open-economy capital flows are handled separately in Mundell-Fleming.
IS and LM are rendered as linear schedules.
The route keeps the geometry readable and the comparative statics transparent.
Parameters
Demand that does not depend on current income.
How sharply spending falls as the interest rate rises.
Baseline rate implied by money-market conditions.
How strongly money demand pushes rates up as output rises.
Shock presets
Higher autonomous spending shifts IS to the right.
A tighter money market shifts LM upward.