Chapter 10 Macroeconomic Equilibrium in the Short Run summary (FEB11002 Macro-economie)
186 views 0 purchase
Course
Macro-economie
Institution
Erasmus Universiteit Rotterdam (EUR)
Book
Macroeconomics
Bright English summary of chapter 10 of the book Burda & Wyplosz. Conveniently divided by section and key terms are in bold. Part of the examination of, among other things the first year of Economics and Business, Fiscal Economics and Mr.drs. program. FEB11002 Macroeconomics.
Chapter 3 The Fundamentals of Economic Growth summary (FEB11002 Macro-economie)
Chapter 5 Labour Markets and Unemployment summary (FEB11002 Macro-economie)
All for this textbook (10)
Written for
Erasmus Universiteit Rotterdam (EUR)
Accountancy and Financial Management
Macro-economie
All documents for this subject (11)
Seller
Follow
SophieEUR
Reviews received
Content preview
Chapter 10: Macroeconomic Equilibrium in the Short Run
1. Overview
To study the short run behaviour of the economy, we adopt a crucial Keynesian assumption
that prices are constant.
Macroeconomic price flexibility is a reasonable working assumption for the long run. Under
price flexibility, the monetary neutrality principle applies, and money and prices behave
independently of output. This long-run independence, or dichotomy, of the real and
monetary dimensions of the economy serves as an important anchor for analysis.
In the long run, prices are fully flexible and neatly separate out nominal and real sides of the
economy.
In the short run, prices do not move, or move rather slowly, the dichotomy fails and
everything becomes more complicated.
The Keynesian model focuses on two markets: (1) the market for goods and services (2) the
money market. We will add the foreign exchange market.
General equilibrium = the simple requirement that all markets achieve equilibrium at the
same time, and that these equilibrium conditions are mutually consistent with each other.
2. Aggregate Demand and the Goods Market
Y = C + I + G + PCA supply for goods and services = demand for goods and services
Public spending G and tax receipts T as exogenous. Wealth too.
Consumption function: C = C(wealth,Y,-T) (++)
Investment function: I = I(q,r) (+-)
Import function: Z = Z(A,ó) (++)
Export function: X = X(A*,ó) (+-)
A* = foreign asorption ó = real exchange rate
Primary current account function: PCA = X(A*,ó) - Z(A,ó) = PCA(A,A*,ó) = PCA(Y,Y*,ó)
The interest rate matters for investment for two reasons:
1. Because a higher interest rate reduces Tobin’s q
2. Because firms borrow from banks to finance investment. When borrowing costs rise,
firms invest less.
! For future reference, we note that it is the real interest rate r that matters for spending
decisions and the nominal interest rate i that is relevant when we look at monetary questions
Adding up the various demand functions according to the national income identify, we
obtain the planned or desired demand function (DD). DD increases with income.
DD = C(Ω,Y-Toverbar) + I(r,q) + G + PCA(Y,Y*, ó)
Desired demand rises with the GDP. But demand increases less than the GDP, which explains
why the DD schedule is flatter than the 45 line.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller SophieEUR. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $3.21. You're not tied to anything after your purchase.
