Ch.23_Spending_in_Short_Run

Ch.23_Spending_in_Short_Run - Ch. 23 Spending and Output in...

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1 Ch. 23 Spending and Output in the Short-Run I. Overview We will now develop a model that can capture the short-run fluctuations in the economy. I will depart significantly from the book. Neoclassical economists believe that all fluctuations in output are fluctuations in potential GDP. Thus, they don’t think you need a separate model for the short-run. (Builds on Classical view of Adam Smith, David Ricardo, etc.) Keynesian economists believe that output often deviates from potential GDP because of market imperfections such as sticky prices . The model we will study in this chapter is a Keynesian model. The Keynesian model is the one that most policy makers and Wall Street professionals have in their heads. It led the government to spend $780 billion on a stimulus package.
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2 I. Overview (cont.) In the Keynesian model, the economy goes into a recession not because the economy has less ability to produce, but because there is insufficient spending. According to this model, output in the short-run is determined by spending, not productive capacity. Thus, a decline in spending can make the economy go into a recession.
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3 II. Key Assumptions of Keynesian Model of Aggregate Expenditure
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4 III. Planned Aggregate Expenditures (PAE) Definition:
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This note was uploaded on 10/24/2011 for the course ECON 3 taught by Professor Peters during the Spring '07 term at UCSD.

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Ch.23_Spending_in_Short_Run - Ch. 23 Spending and Output in...

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