Quick Summary

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ISLMADAS.xls augments the ISLM Model with ADAS. The feedback mechanism from P to real balances and the mechanics of the model are emphasized, with continuing exploration of comparative statics properties and multipliers. Short- and long-run equilibration are reviewed, and the Lucas critique is demonstrated.

Screencasts

1. • http://vimeo.com/econexcel/islmadasintro: introduces the ISLMADAS Model and points out how it extends the ISLM Model by endogenizing the price level; this is similar to the way that ISLM extended the simple Keynesian Cross graph by connecting income to money demand

2. • http://vimeo.com/econexcel/islmadasadjustment: shows how the ISLMADAS Model determines short- and long-run equilibrium positions for the economy

3. • http://vimeo.com/econexcel/islmadasmultiplier: shows how the price feedback in the ISLMADAS model shrinks the G multiplier relative to the ISLM Model, where there is no price feedback

4. • http://vimeo.com/econexcel/islmadasart: shows how to draw the ISLMADAS Model “by hand” and explains how the IS and LM curves adjust to the ADAS graph

5. • http://vimeo.com/econexcel/islmadasapplied: shows how to use the ISLMADAS Model to interpret shocks and apply policies

6. • http://vimeo.com/econexcel/islmadaslucas: explains how the Lucas critique applies to the ISLMADAS Model – by shifting SRAS as policies are enacted to stimulate the economy, rational agents short-circuit the policy maker's attempts to manipulate the economy; policy is best understood as game theory, not as turning dials to control a machine

Introduction

The ISLMADAS.xls workbook presents the ISLMADAS Model as a natural extension of the ISLM Model. Having derived AD as Ye = f(P), short-run (SRAS) and long-run (LRAS) aggregate supply are added to enable determination of equilibrium P and Y. As with the ISLM Model, the emphasis is on understanding the linkages among graphs and variables, how the model behaves under different parameter values and elasticities, and how to use the model to interpret events of the day and policy effects.

Common Problems for Students

While individual details can cause problems, the real difficulty in the ISLMADAS Model lies in its seemingly overwhelming number of variables and intricate relationships between graphs.