11-01-25-Keynesian-a

# 11-01-25-Keynesian-a - The Other Two Equations, Y d And LM,...

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The Classical Solution Of The Macromodel The model is solved in three steps. 1. Since Y s is vertical at z·Y 0 (because it does not depend on r or p, output, Y, is determined by this equation (curve) alone. Y = z·Y 0 . 2. Since Y d does not depend on p, we can find the equilibrium value for r by substituting z·Y 0 for Y in this equation. r = [a+I 0 +G 0 - (1-b)·z·Y 0 ]/h

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Solving for p 3. We now know the equilibrium values of Y and r. To find the value of p substitute those values into the money demand equals money supply equation. You obtain p = m s T – m d 0 - .001·z·Y 0 + [a+I 0 +G 0 -(1- b)·z·Y 0 ]/h
The Keynesian View Assumes That The Labour Market Does  Not Clear (So The Quantity Supplied Does  Not Equal The Quantity Demanded).  The  Curve That Resulted From That  Equilibrium, Y s , Is Consequently Ignored. The Price Level Is Assumed To Fixed At 1.

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Unformatted text preview: The Other Two Equations, Y d And LM, Are Solved For Equilibrium Values Of Y And r. Solution Of Model Using Keynesian Fixed Price View (Assumes d = 0) r = [(1 + m d-m s T )(1-b) + .001(a+I +G )]/[.001h + (1-b) l ] p = 1 Y = [(a+I +G ) l + h(m s T-m d-1)]/[.001h + (1-b) l ] Some Implications When h = 0, expansionary monetary policy (a rise in m s T ) has no impact on Y, even though it lowers the interest rate. When l = 0, fiscal policy (a change in G ) has no impact on Y, while monetary policy has a big effect. When h = , fiscal policy has no effect on Y, and monetary policy has a large impact. When l = , fiscal policy has a multiplier effect, and monetary policy has no effect (liquidity trap)....
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## This note was uploaded on 07/16/2011 for the course ECON 2154 taught by Professor Boyer during the Winter '10 term at UWO.

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11-01-25-Keynesian-a - The Other Two Equations, Y d And LM,...

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