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The AD curve can of course be given many interpretations but mathematically it is, as Rao
points out, the reduced form of the IS-LM (three market) model with P as the independent
(exogenous) variable and Y as the dependent (endogenous) variable. It is as good or as bad
as the IS-LM model. First year US texts, even those in the Keynesian tradition, do not use
this model and so are forced to derive the AD curve from the E = Y diagonal cross diagram.
UK texts typically use IS-LM as so derive the AD graphically in a way that is consistent
with its mathematical derivation. (I gave the IS-LM derivation in graphs and algebra in
the nth edition of An Introduction to Positive Economics -- then the standard UK
introductory text book-that came out in the early 1980s. (I am travelling and so cannot
check the edition number, but it was probably about the 6th or 7th)
 
As more and more texts, particular in the US, omit the Keynesian income flow model, the
interpretation of the AD curve gets increasingly far from its origins and is given
increasingly novel interpretations.
 
A major problem, as Colander has pointed out in this exchange, is that the AD curve (and
its underlying IS-LM apparatus) reduces the Keynesian vision of the economy as dynamic
disequilibrium processes that takes place in real time to a comparative statics vision in
which only equilibrium positions are analysable. (Swedish process analysis was an example
of a set of theories that worked in the dynamic disequilibrium vision.) The shift to
comparative statics is unfortunate, and lost many of Keynes' insights in the process, but
most first (and second) year teachers have trouble getting comparative statics over
without introducing dynamic complication, even at a verbal level. Most of us who has been
involved in text book writing have experienced the extreme market pressure to suppress
criticisms and worries about the main-line models that are being taught. "Let them learn
the orthodox and let more advanced courses introduce worries" is the usual market reaction
to anyone who tries to introduce worries at more elementary levels. (Sadly all to many
courses omit the worries and criticisms even at the more advanced levels.)
 
Richard G. Lipsey 
 
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