Inequality and Aggregate Demand in the Is‐lm and Is‐mp Models

Abstract

This paper presents an extension to the textbook IS‐LM and IS‐MP models that allows the short run effects of an increase in household income inequality to be studied in a simple manner. The income distribution is assumed to be log‐normal, and the coefficient of variation of income is assumed to be exogenous. The latter is used as the measure of income inequality, and enters otherwise standard IS and LM curves in a straightforward manner. While the models are highly stylised, they can easily be extended to more complicated variants.