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10-01-26d (6) (1)

# 10-01-26d (6) (1) - 1 • The Other Two Equations Y d And...

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

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Unformatted text preview: 1. • The Other Two Equations, Y d And LM, Are Solved For Equilibrium Values Of Y Solution Of Model Using Keynesian Fixed Price View • r = [(1 + m d-m s T )·(1-b) + .001·(a+I +G )]/[.001·h + (1-b)· l ] • p = 1 • Y = [(a+I +G )· l + h·(m s T-m d-1)]/[.001·h + (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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