# 11-7-07 - -suppose G increases-then By equation(1 Y...

This preview shows pages 1–2. Sign up to view the full content.

-In Short Run, Wages are sticky -Keynesians view economic fluctuations as the result of shifts in AD “supply side” “trickle down” -both are opposite of Keynesian -suppose AD increases -real GDP increases -Also Prices Increase -eventually workers demand wage increase, which will reduce SRAS -suppose AD decreases -real GDP decreases -also Price decreases -so govt must increase spending to increase AD -consider mid 70’s -opec reduced supply of oil to west -this reduced SRAS -real GDP decreases -and price increased “stagflation” -consider very short run when all prices are sticky Let C=consumption I=investment G=govt spending Y=real GDP Y=C+I+G (1) -note when G increases, Y increases -but C depends on Y C=A+BY (2) -B is positive ,so as y increases, c increases

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: -suppose G increases-then By equation (1), Y increases-but by equation (2), if Y increases, C increases-by equation (1) if C increases, Y increases again-and so on-economist call this “fredbank”-size of “Keynesian multiplier” depnds on B in equation (2)-b is the “marginal propensity to consume”-MPC-part of the increase in income that is consumed Y C I G AE 1 1 2 1 .5 1 1 2.5 2 1 1 1 3 3 1.5 1 1 3.5-assume I and G do not depend on Y-note : MPC = .5-because I and G do not vary with Y, called “autonomons” expenditures-and C as “induced” expenditures Y=C + I+ G-so C + I + G is aggregate expenditures (AE)-in equilibrium, AE=Y...
View Full Document

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern