How to Construct is and LM Curves in the Spirit of Hicks or, Why We do not Need the Aggregate Demand Curve

  • Ingo Barens
Part of the Recent Economic Thought book series (RETH, volume 73)


Ever since the aggregate demand curve (AD)-aggregate supply curve (AS)-framework was introduced to augment the fix price IS-LM analysis of macroeconomic textbooks in order to determine the price level, the nature of the aggregate demand curve and its relation to the IS curve has been the object of discussion.1 Rabin and Birch (1982) pointed out that if the IS curve is interpreted as the equilibrium curve of the goods market, determining the equilibrium price level within the AD-AS diagram will lead to a logical contradiction: on the one hand, every point on the AD curve, derived by shifting the LM curve along the IS curve, will represent goods market equilibrium while, on the other hand, only the point of intersection of AD and AS curve can qualify as goods market equilibrium. Thus for every point on the AD curve except its intersection with the AS curve one has equilibrium and disequilibrium of the goods market simultaneously.


Price Level Aggregate Demand Market Equilibrium Good Market Money Market 
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  • Ingo Barens

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