We construct a 3-dimensional extension of the dynamic IS-LM model, in which the money demand function depends not only on income but also on a rate of change in expected income (RCEI). We demonstrate the occurrence of limit cycles in the extended IS-LM model. Our arguments are essentially derived from the remarkable viewpoint of H. P. Minsky and J. R. Shiller concerning financial markets. We assume that the money demand negatively correlates with RCEI. Such a negative correlation results from a speculative behavior. We demonstrate that the negative correlation is an important source of unstable equilibrium and therefore, business cycles. Firstly, we transform the extended IS-LM model into a 2-dimensional Lienard system and prove the occurrence of a stable limit cycle in the Lienard system. Secondly, by using a Hopf bifurcation theorem, we demonstrate the occurrence of a Hopf cycle in the extended 3-dimensionl IS-LM model. Our model possesses two types of self-fulfilling prophecy
