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Unformatted text preview: 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 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 Lets 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 govt Y= Yd ) 4. I = Iplanned + Iunplanned . Planned aggregate expenditure 5. AEplanned = C + Iplanned . The Keynesian equilibrium condition : 2/16/2012 3 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 Ip + Iu > Ip Iunplanned > 0 2/16/2012 5 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 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 Whats the multiplier? The change in rGDP generated by a change in autonomous aggregate expenditure....
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This note was uploaded on 02/10/2012 for the course ECON 102 taught by Professor Rossana during the Winter '08 term at University of Michigan.

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