Editing IS–LM model (section)

==Incorporation into larger models==
By itself, the traditional IS–LM model is used to study the short run when [[price level|prices]] are fixed or sticky, and no [[inflation]] is taken into consideration. In addition, the model is often used as a sub-model of larger models which allow for a flexible [[price level]]. The addition of a supply relation enables the model to be used for both short- and medium-run analysis of the economy, or to use a different terminology: classical and Keynesian analysis.<ref name=araujo/>

A main example of this is the Aggregate Demand-Aggregate Supply model – the [[AD–AS model]].<ref name=araujo/> In the aggregate demand-aggregate supply model, each point on the aggregate demand curve is an outcome of the IS–LM model for aggregate demand Y based on a particular price level.  Starting from one point on the aggregate demand curve, at a particular price level and a quantity of aggregate demand implied by the IS–LM model for that price level, if one considers a higher potential price level, in the IS–LM model the real money supply M/P will be lower and hence the LM curve will be shifted higher, leading to lower aggregate demand as measured by the horizontal location of the IS–LM intersection; hence at the higher price level the level of aggregate demand is lower, so the aggregate demand curve is negatively sloped.<ref name=mankiw/>{{rp|315-317}}

In the 2018 textbook "Macroeconomics" by [[Daron Acemoglu]], [[David Laibson]] and [[John A. List]], the corresponding model combining a traditional IS-LM setup with a relation for a changing price level is named an IS-LM-FE model (FE standing for "full equilibrium").<ref name="acemoglu_etal_2018">{{Cite book|last=Acemoglu|first=Daron |title=Macroeconomics |date=2018 |author2=David I. Laibson |author3=John A. List |isbn=978-0-13-449205-6 |edition=Second |publisher=Pearson |location=New York |oclc=956396690}}</ref>

===AD-AS-like models with inflation instead of price levels=== 

In many modern textbooks, the traditional AD–AS diagram is replaced by a variation in which the variables are not output and the price level, but instead output and inflation (i.e., the change in the price level). In this case, the relation corresponding to the AS curve is normally derived from a [[Phillips curve]] relationship between inflation and the unemployment gap. As policymakers and economists are generally concerned about inflation levels and not actual price levels, this formulation is considered more appropriate. This variation is often referred to as a dynamic AD–AS model,<ref name=SWJ/><ref name=mankiw>{{cite book |last1=Mankiw |first1=Nicholas Gregory |title=Macroeconomics |date=2022 |publisher=Worth Publishers, Macmillan Learning |location=New York, NY |isbn=978-1-319-26390-4 |edition=Eleventh, international}}</ref> but may also have other names. Olivier Blanchard in his textbook uses the term IS–LM–PC model (PC standing for Phillips curve).<ref name=blanchard/> Others, among them Carlin and Soskice, refer to it as the "three-equation New Keynesian model",<ref name=Davis/> the three equations being an IS relation, often augmented with a term that allows for expectations influencing demand, a monetary policy (interest) rule and a short-run Phillips curve.<ref name=araujo/>