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Exploring the Disequilibrium IS-LM Model: A Dynamic Approach
A dynamic analysis of a simple IS-LM model is constructed to contrast its results with those of a comparative statics analysis. The main features of this dynamic analysis are that it takes time, speed of adjustment, direction, and spiraling into account. A dynamic analysis reveals that this path from disequilibrium is always headed toward equilibrium and that there is a possibility for spiraling when the marginal propensity to consume is large or when people’s desire to hold cash is sensitive to interest rates.