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The IS/MP Model

In the IS/LM Model, the nominal interest rate appears on the vertical axis of the IS/LM diagram and the price level appears on the vertical axis of the AS/AD diagram.  This mismatch of a rate of increase with a level does not make it easy to discuss the relation between the interest rate and the rate of inflation.

The IS/MP Model features the real interest rate on the vertical axis of the IS/MP diagram and the inflation rate on the vertical axis of the AD/IA diagram.  This facilitates discussion of how monetary policy, for example, might be expressed in terms of interest rates and inflation rates.

The IS/MP Diagram

The real interest rate appears on the vertical axis.

The IS Curve

Several Keynesian models incorporate an IS Curve.  The expanded discussion covers all these cases.

The Monetary Policy Curve

flat vs. upward sloping.  The central bank achieves this by a combination of the supply and demand for money (ref) and interest rate targeting. 

The AD/IA Diagram

The inflation rate appears on the vertical axis.

Aggregate Demand


Inflation Adjustment

flat vs. upward sloping

Relation to Phillips Curve

Replacement for Aggregate Supply

Romer (adv macro) still calls it AS.


The EconModel presentation show both the case of horizontal MP and IA curves and upward sloping versions of those curves.

Building Blocks

The EconModel presentation explains the following curves:

IS Curve

MP Curve

IA Curve

AD Curve


The EconModel presentation analyzes the effects of changes in:

Government Spending/Taxes.  The fiscal policy effects are similar to those for the IS/LM Model.  ref

A shift in the Fed's real interest rate target accomplished by moving the MP curve up or down. ref

The Simple Keynesian Model

The Simple Keynesian Model can be expressed as a special case of the IS/MP Model.  more.


The IS/MP Model is discussed in detail in Paul Romer, Short-Run Fluctuations.  You will also need the tables.  The model also appears in his graduate-level textbook, Advanced Macroeconomics.

Gregory Mankiw explains his decision to stick with the IS/LM framework in his undergraduate textbook.

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