Econ310_Notes20101111a - Keynesian Models (IS/LM)...

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Keynesian Models (IS/LM) (11/11/2010) Econ 310- 004 Definitions animal spirits – emotional waves of optimism and pessimism that influence investment spending, causing wild fluctuations broken window fallacy – fallacy of taking into account easy to see positive effects of a policy, but not taking into account negative hidden effects of a policy liquidity trap – demand for money is infinitely elastic (LM curve horizontal), causing monetary policy to be completely ineffective Equations C = c 0 + c(Y – T) Y = C + I + G + NX Y = [1/(1–c)](c 0 – cT + I + G + NX) Y = C(Y-T, i- π e ) + I(i- π e ,Y -1 ) + G + X( ,Y,Y*) ρ M/P = L(i,Y) BoP = X( ,Y,Y*) + (i-i*) + k ρ σ Variables C consumption T taxes I investment G government spending NX net exports Y nominal income c 0 autonomous consumption c marginal propensity to consume IS goods market in equilibrium LM money market in equilibrium BoP balance of payments in equilibrium KA capital inflow KA capital outflow Multipliers Y/ I = 1/(1–c) Δ Δ Y/ G = 1/(1–c) Δ Δ Y/ NX = 1/(1–c) Δ Δ Y/ c Δ Δ 0 = 1/(1–c) Y/ T = -c/(1–c)
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Econ310_Notes20101111a - Keynesian Models (IS/LM)...

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