V. Almenar-i-Llongo1, R. Bruno2, F. Hernandez-Sancho3

1Universidad Europea de Valencia (SPAIN)
2University College London (UNITED KINGDOM)
3Universitat de València (SPAIN)
Recent events should force everyone who teaches macroeconomics about what should and should not be changed in the way economists teach macro principles to beginner students, concretely, how much additional complexity must be and can be introduced in a principles course in which the students are relatively unsophisticated (Blinder, 2010).

Indeed, the macroeconomic models that are taught in a standard course "omit certain variables that have manifested in the relevant origin and evolution of the crisis, and it takes students to ask questions looking for the missing link between the theory explained and the information they receive from the media. For example, how the interest rate affects consumption? In what respect the household wealth (real or perceived) affects consumption? What has been the role of interest rates on home purchases by families and why not in the home ownership model if it is a part of the investment? And why transfers are considered fixed if these increase with the level of unemployment? Etc .

This is the reason that in this work we propose to extend the IS-LM model by adding variables to better understand the causes and development of the current economic crisis, taking as reference the particular case of the Spanish economy. We have used the IS-LM model (also known as neoclassical synthesis), since, in general, it is considered as an important pedagogical tool in economic theory, as it is a starting approximation for understanding the real world (even if it has its own limitations, especially in terms of lack of a robust micro-foundation).

In a second step, this model IS-LM has been implemented in a Microsoft Office Excel spreadsheet, as this program, through the smart recomputation of cells, automatically produces new solutions of the equilibrium if you change any variable or model parameter. This allows us analyse the macroeconomic effects of exogenous shocks and simulate the effects of the implementation of various economic policies in the major macroeconomic variables.