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Econ+102+lecture+12%2C+2-16-12+-+Equilibrium+in+the+SR copy

# Econ+102+lecture+12%2C+2-16-12+-+Equilibrium+in+the+SR copy...

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Lecture 12: Equilibrium  in the short run Econ 102, Winter 2012 2/16/2012 1 Required reading : Ch 11: pp. 306-310 Ch 11 apdx: p. 314 Ch. 12: pp. 315 - 329

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Outline 1. Equilibrium in the Keynesian Cross 2. Equilibrium algebra without government 3. From the Keynesian Cross to Aggregate Demand 4. SRAS and SR equil 2/16/2012 2
The Keynesian Cross equilibrium Let’s review our key equations 1. GDP = Y (spending = income, Ch. 1) 2. GDP = C + I (aggregate expenditure, Ch. 7) 3. C = A + MPC* Yd (where no gov’t  Y= Yd ) 4. I = Iplanned + Iunplanned . Planned aggregate expenditure 5. AEplanned = C + Iplanned . The Keynesian equilibrium condition : 6. GDP = AEplanned 2/16/2012 3

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The Keynesian Cross equilibrium AEp rGDP AEp = rGDP 4
The Keynesian Cross equilibrium Equilibrating force: unplanned investment In individual markets, excess supply and demand always push P & Q towards equilibrium values In the aggregate economy, the existence of unplanned investment always pushes towards equilibrium rGDP When rGDP > rGDP*: rGDP > AEp Firms produced “too much”, consumption was lower than expected and build up unplanned inventories. Need to produce less next year; lay off workers & rGDP↓ When rGDP < rGDP*, Iu < 0, firms didn’t produce Ip + Iu > Ip Iunplanned > 0 2/16/2012 5

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The Keynesian Cross equilibrium AEp rGDP AEp = rGDP 6
Keynesian Cross algebra  So goes the graphical representation of equilibrium rGDP We can be more precise and determine equilibrium exactly, using a little bit of algebra. Two major equations determined equilibrium: 1. AEp = C + Ip . i.e., the planned aggregate expenditure function 2. rGDP = AEp, i.e., the equilibrium condition Combine the two above to get rGDP = A + MPCxrGDP + Ip = A + MPCxrGDP + Ip 2/16/2012 7

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Keynesian Cross algebra  rGDP = A + MPCxrGDP + Ip This equation allow us (under the assumptions of Chapter 11) to: 1. Derive the multiplier (as in the appendix to Ch. 11) 2. Find the value of any equilibrium output, rGDP * First, re-arrange the equation: rGDP* = A + MPCxrGDP * + Ip rGDP * - MPCxrGDP * = A + Ip (1 – MPC) xrGDP * = A + Ip MPC 1 I A rGDP p * - + = 8 2/16/2012
Keynesian Cross algebra  What’s the multiplier? The change in rGDP generated by a change in autonomous aggregate expenditure. For example, suppose A changes from A1 to A2 ∆rGDP = rGDP2 – rGDP1 = MPC 1 I A rGDP p * - + = MPC 1 I A p 2 - + MPC 1 I A p 1 - + - MPC 1 ) I (A - ) I (A ΔrGDP p 1 p 2 - + + = MPC 1 A MPC 1 A - A ΔrGDP 1 2 - - = MPC 1 1 A ΔrGDP - = 9

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Keynesian Cross algebra
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