Aggregate Supply and Price in an LM-IS-BP Framework

This paper introduces aggregate supply into conventional LM-IS-BP analysis through the agency of the balance of payments, BP, line. This allows analysis of both price as well as quantity adjustments, and provides a richer framework for students of intermediate macroeconomics attempting to develop their analytical skills. The model assumes the small country case, most relevant to Australia, and perfectly elastic capital flows. The latter assumption follows from the depth and ranking of the Australian dollar as an international currency.