FIGURE 10-15
The Theory of Short-Run Fluctuations This schematic diagram shows how the different pieces of the theory of short-run fluctuations fit together. The Keynesian cross explains the
IS curve, and the theory of liquidity preference explains the
LM curve. The
IS and
LM curves together yield the
IS–
LM model, which explains the aggregate demand curve. The aggregate demand curve is part of the model of aggregate supply and aggregate demand, which economists use to explain short-run fluctuations in economic activity.