Chapter 10 - Kimberly Zhang Chapter 10 IS-LM model leading...

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Kimberly Zhang Chapter 10 IS-LM model, leading interpretation of Keynes’ theory o Goal of model is to show what determines national income at any given price level IS curve (investment and saving): relationship between interest rate and income in the market for goods and services o Keynesian cross: simplest interpretation of Keynes’ theory of national income Planned expenditure: amount households, firms and government would like to spend on goods and services Actual expenditure might differ from planned expenditure Firms might engage in unplanned inventory investment because their sales don’t meet expectations E(xpenditure) = C + I + G E = C(Y – T ) + I + G Slope of the line is MPC o Slopes upward because higher income leads to high consumption and higher planned expenditure Economy is in equilibrium when actual expenditure equals planned expenditure When plans have been realized, no reason to change Actual expenditure = planned expenditure Y = E
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