Monetary Policy in the Keynesian Model -- numerical

# Monetary Policy in the Keynesian Model -- numerical - Model...

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Monetary Policy in the Keynesian  Model Basic idea… Incr Ms   decr r   incr II   incr AD     incr equilib Y

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Basic Model C = 1000 + .8(Y – T)                 T =  -1800 + .2Y       X  = 2000 G = 1200                 IM =  200 + .1Y  II = 2840 – (460)(r) M = 1300    M d  = 1600 – (100)(r) R req  = 20%   ER = currency = 0
Solve for equilibrium in money market Find r such that qty M s  = qty M d 1300 = 1600 – (100)(r) (100)(r) = 300       r = 3   (3%)

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Solve for level of II II = 2840 – (460)(r) II = 2840 – (460)(3) II = 1460
Solve for equilibrium level of Y           C 0  + II 0  + G 0  + NX 0  – (mpc)(T 0 )                (1 – (1-t)mpc + m)        1000 + 1460 + 1200 + 1800 – (.8)(-1800)                   (1 – (1- 0.2)(.8) + 0.1) Y = 15,000 Y =   Y =

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Suppose a recessionary gap… Y* = 16,000
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