INVESTMENT_INCREASES

INVESTMENT_INCREASES - TEMPORARILY EXCEEDS THE POTENTIAL GDP Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P

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LECTURE 1 INCREASE IN INVESTMENT PROSPECTS
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THE MACRO ECONOMIC MODEL Introduction to Economics Class Notes Fall 2000 Charles R. Plott California Institute of Technology
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Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P M * /P * P * W / P Y P UNKNOWNS .Y income .C consumption .I investment .i interest rate .P price level .L employment .MD money demand .MD T transaction demand for money .MD S speculative demand for money .w nominal wages level GIVENS G Government spending X net exports M nominal money supply b marginal propensity to consume EQUATIONS .Y=C+I+G+X .C=a(i)+bY .I=I(i) .M/P = MD .MD=MD T +MD S .MD T = MD T (Y) .MD S = MD S (i) .DL(w/P)-SL(w/P)=0 .L=SL(w/P)
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Lecture 1 THERE IS A SHIFT IN INVESTMENT EXPECTATIONS EXPECTATIONS BECOME MORE OPTIMISTIC
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Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P M * /P * P * W / P Y P
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AGGREGATE DEMAND EXCEEDS AGGREGATE SUPPLY AND PRICES BEGIN TO DRIFT UPWARD
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Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P M * /P * P * W / P Y P
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THE LABOR MARKET AND AGGREGATE SUPPLY RESPOND AS LABOR PERCEPTIONS AND EXPECTATIONS OF PRICE INCREASES LAG THE ACTUAL INCREASES AGGREGATE SUPPLY
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Unformatted text preview: TEMPORARILY EXCEEDS THE POTENTIAL GDP Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P M * /P * P * W / P Y P NOMINAL WAGE INCREASES WITH LAGGING KNOWLEDGE OF PRICE INCREASES HAVE CREATED AGGREGATE SUPPLIES ABOVE THE POTENTIAL GDP. AS EXPECTATIONS ARE BROUGHT INTO LINE WITH REALITY THE REAL WAGE RETURNS TO THE EQUILIBRIUM LEVEL AND AGGREGATE SUPPLY RETURNS TO THE POTENTIAL GDP. Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P M * /P * P * W / P Y P PRICE INCREASES (INFLATION) SHRINKS THE REAL MONEY SUPPLY. THIS CAUSES FURTHER INTEREST RATE INCREASES AND CHOKES OFF INVESTMENT SPENDING. AGGREGATE DEMAND IS BROUGHT BACK INTO LINE WITH POTENTIAL GDP. Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 +a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P M * /P * P * W / P Y P...
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This note was uploaded on 07/03/2008 for the course EC 11 taught by Professor Plott during the Fall '08 term at Caltech.

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INVESTMENT_INCREASES - TEMPORARILY EXCEEDS THE POTENTIAL GDP Y Y i i i Spending a I a 1 I 1 a I I 1 I 1 a 1 Y 1 Y 2 i MD T MD T Y Y P P M/P M/P M/P

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