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ch9 - Chapter 9 IS-LM/AD-AS Model Two Views Keynesian...

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Chapter 9 IS-LM/AD-AS Model
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Two Views Keynesian tradition asserts that government policy can help stabilize the economy Monetarist and rational expectations tradition: government intervention tends to destabilize the economy. In their view, the market system is self-adjusting
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II. Income expenditure model . Y = ƒ(capacity utilization) B. Capacity Utilization = ƒ(entrepreneurial expectations regarding receipts) Productive capacity used depends on entrepreneurial expectations. That is, utilized productive capacity depends on entrepreneurs' expectation of the demand for output
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C. Expected receipts = ƒ(AD) D. Hence, Keynes’ theory of output and employment is a theory of AD
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Aggregate demand AD = C + I + G + (X-IM) AD = C + I + G +(X-M) C = Co + cy(Y- To –tY) – c r r I = Io - i r r
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Equilibrium Equilibrium conditions: Y = AD I+ G + X = S + T + IM
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Y= C+I+G+(X-IM) Y = Co + cy(Y- To –tY) – c r r + Io – i r r + G + (X-IM) Y(1-c+ct) = To + Io + G + (X-IM) – r(c r + i r ) Y= [1/(1-c+ct)]*[To + Io + G + (X-IM) – r(c r + i r )]
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Multiplier 1. The multiplier is the multiple by which income changes owing to an autonomous change in expenditures.
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