Intermediate macroeconomics

IS-LM and the AD-AS Model

Build the short-run macro model from the ground up: the IS-LM block fixes output and the interest rate, aggregate demand falls out as the locus of IS-LM equilibria across price levels, and aggregate supply closes the model. Apply a fiscal, monetary, or supply shock and watch the economy adjust from the short run back to potential output.

Macroeconomics Business cycle Intermediate Native JS Growth, business cycles, and open economy

Focus

IS-LM, the derived AD curve, short-run vs long-run, and self-correction to potential

See how aggregate demand is derived from IS-LM, then apply demand and supply shocks and watch the short-run equilibrium animate back to potential output.

Interactive diagram

IS-LM / AD-AS — explore it instantly

Loads immediately, works on any phone, and is fully readable by search engines.

IS LM AD SRAS LRAS (Y*) Pre-shock

How to read this

The top panel is the IS-LM model: the IS curve is every output–interest-rate pair that clears the goods market, the LM curve every pair that clears the money market. Their crossing is the short-run equilibrium. Because the LM curve depends on real money M/P, a higher price level shifts it left and lowers equilibrium output — tracing that out gives the downward-sloping aggregate-demand (AD) curve in the bottom panel. AD is not a primitive; it is the IS-LM equilibrium locus.

The bottom panel adds aggregate supply: an upward-sloping short-run AS anchored on expected prices, and a vertical long-run AS at potential output Y*. A shock pushes output off potential in the short run. Then expectations adjust, SRAS slides, and output animates back to Y* — at a new price level for a demand shock, or back to the original price for a supply shock. The vertical guide line links the same output across both panels.

What to explore

Change parameters and watch the model adjust.

Government spending and the money supply
Cost-push supply shock and potential output

Core ideas

Interpret the mechanics before you chase the graphs.

Aggregate demand is the set of output levels at which the goods and money markets both clear.
A demand shock self-corrects to potential at a new price level; a supply shock returns to the original price.
Money is neutral in the long run: it sets the price level, not output.

Learning goals

What this model should help students internalize.

Read the IS-LM equilibrium and see how the price level shifts the LM curve through real balances.
Understand aggregate demand as the locus of IS-LM equilibria, not a primitive curve.
Trace a fiscal, monetary, or supply shock from the short-run equilibrium back to potential output.

Prerequisites

Concepts to review before diving in.

The goods market and the multiplier
Money demand and the interest rate

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