ECON 402 Lecture Notes - Lecture 10: Keynesian Cross, Aggregate Demand, Aggregate Supply
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The model of aggregate demand and aggregate supply. Long run: price flexible, output determined by factors of production and technology, unemployment equals nature rate. Short run: price fixed, output determined by agg demand, employment negatively related to output. Simple closed-economy model, income is determined by expenditure. Notation: i = planned investment, pe = c+i+g = expenditure, real gdp = y = actual expenditure, unplanned inventory investment = difference between actual and planned expenditure. Elements of the keynesian cross: consumption function: c = c(y-t, govt policy : g =g t = t, planned investment: i = i, planned expenditure: pe = c(y-t) + i + g, equilibrium condition: Is curve is negative: fall in interest rate- > increase investment spending -> increase planned spending, to restore equilibrium -> output must increase. Lm curve is upward sloping: an increase in income -> raise money demand, excess demand in the market at the initial interest rate, to restore equilibrium -> interest must increase.