Friday, March 11, 2011

The Simple Keynesian Model

The Simple Keynesian Model, which is also known as the Keynesian Cross, emphasizes one basic point. That point is that a decrease in aggregate demand can lead to a stable equilibrium with substantial unemployment.

The Simple Keynesian Model application first explains the roles of consumption and investment and then explains the accounting identity Y = C + I + G. Together, these elements determine the equilibrium level of output.

The policy analysis experiments study the effects of animal spirits and fiscal policy. The numerical results illustrate the calculation of a fiscal policy multiplier.

A concluding experiment extends the model to make investment a function of the interest rate. Graphing the shifts in investment caused by changes in interest rates then reveals a simple version of the IS curve found in an IS/LM analysis.

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