Keynesian System1 - Keynesian System The Role of Aggregate...

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Keynesian System The Role of Aggregate Demand
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Unemployment in the Great Depression
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The Central Concept Equilibrium production requires output be equal to aggregate demand or Y = E where E is aggregate demand For the domestic economy (no international sector), aggregate demand is E = C + I + G C = consumption, I = investment G = government purchases
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Assumptions and Equilibrium Conditions Price changes are ignored in chapters 5-7. All variables are expressed in real terms. I is intended (or planned) investment and I r is realized investment In equilibrium Y = E = C + I + G = C + S + T S + T = I + G I r = I
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Resource Market Output Market Households Firms I. Production Function II. Labor Demand III. Labor Supply V. Aggregate Supply Aggregate Demand IV. Labor Market Loanable Funds Market Government Spending Purchases Taxes Saving Investment VI. Interest Rate Effects VII. Government Financing a. Taxes b. Bonds c. Money Consumption Business Income Household Income Business Costs
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Adjustment to Disequilibrium When Y > E and I r > I there is unintended inventory accumulation Unintended inventory accumulation prompts reduced production which can lead to increased unemployment When Y < E and I r < I there is unintended inventory shortfall Unintended inventory shortfall prompts increased production which can lead to increased employment
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Consumption
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Keynesian System1 - Keynesian System The Role of Aggregate...

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