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11-02-01a

# 11-02-01a - Introduction To Keynesian Models These Slides...

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Introduction To Keynesian Models These Slides Show How Our Y ,

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Keynesian Analysis The Keynesian Model Assumes That Prices Are Given In The Short Run, And That The Market-Clearing Equation For The Labor Market (The Y s Locus) Can Be Ignored (In The Short Run). The Value Of The Price Level In The Short Run Is Chosen As P = 2.7 (So That Its Natural Logarithmic Value, p, Is Equal to 1.)
Equations For Keynesian Model S + T – I – G = 0 S = -a + (1-b)·Y d – T = -70 + .33·Y d - T C = a + b·Y d = +70 + .67·Y d I = I 0 – h·r = 190 – 1000·r T = T 0 = 300 G = G 0 = 300

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The Y d Equation -a +(1-b)·Y d - T 0 + T 0 – I 0 +h·r – G 0 = 0 So, Y d = (a + G + I 0 )/(1-b) – h·r/(1-b) Or, In Numbers, Y d = 1680 – 3000·r
The LM Curve, With d = 0 m s T = p + m d 0 +.00067·Y - l ·r Or Y = 1500·(m s T – p – m d 0 + l ·r) Substituting In Our Favorite Numbers For The Benchmark Model, We Get: Y = 1500·(7 – 1 – 5.12 + 2·r) Simplifying Y = 1320 + 3000·r

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Two Equations, Two Unknowns The Solution To The System Of Equations Y = 1680 – 3000·r And Y = 1320 + 3000·r Is: Y = 1500, And r = .06 Our Third Unknown, p, (Not Really An Unknown In The Keynesian View) Is Equal To 1
r Y Y d , IS Y s , FE 1500 .06 LM mst=7,p=1 1650 LM mst=7.1,p=1 K C

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r Y Y d , IS 1500 .06 LM mst=7,p=1
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11-02-01a - Introduction To Keynesian Models These Slides...

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