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KeynesianCompStat

# KeynesianCompStat - interest rates 4 Extension Extension...

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Comparative Static Analysis Comparative Static Analysis of the Keynesian Model of the Keynesian Model Macroeconomics I ECON 309 -- Cunningham

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2 Simple IS-LM Analysis Simple IS-LM Analysis 0 ) , ( 0 ) ( ) ( = - = - - P M r Y L G r I Y S Two equations, two endogenous variables ( Y and r ), and one exogenous variable G . Real money supply ( M/ P) is taken as constant since nominal money ( M ) and ( P ) are exogenous as well. Take total differentials: 0 = + = - dr L dY L dG dr I dY S r Y r Y = - 0 dG dr dY L L I S r Y r Y Write in matrix form:
3 Simple IS-LM, Continued Simple IS-LM, Continued 0 0 1 0 0 1 + - = - = + = - - = Y r r Y Y r Y r Y Y Y Y r r Y r r Y r Y r r L I L S L L L I S L S dG dr L I L S L L L I S L I dG dY Applying Cramer’s rule for solution: 0 , 0 0 , 0 < < r Y Y r I S L L Because, by assumption, the following hold: So, in a Keynesian economy, under the conditions given, cet. par. (i.e., prices), an increase in government spending increases GDP and

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Unformatted text preview: interest rates. 4 Extension Extension What if prices are flexible? To examine this, we must include the labor market and real wage computation. ) , ( ) ( ) ( ) (--=--=-=- P M r Y L G r I Y S N F Y N P w N d Define the following variable as a convenience: ( 29 2 -∂ ∂ = P w P w N X d 5 Extension (Continued) Extension (Continued) 1 1 1 1 2 2-=------= Jac X F L P M L L I S F X P M L I F X dG dY N r r Y r Y N r r N (Note that the denominator turns out to be positive.) < -= dG P w d dG dP dG dr Jac X L dG dN r Similarly:...
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