MGEB06H3 Lecture Notes - Lecture 10: Money Supply, Keynesian Cross, Real Interest Rate
19 Aug 2016
School
Department
Course
Professor
Document Summary
Ch 10 - supplemental notes and exercises #1. The keynesian cross - a simple model of sr income determination. Keynes postulated that in the sr an economy"s aggregate (real) income was determined largely by the desire to spend by households, firms, and the government. Thus, the problem during recessions and depressions, according to keynes, was inadequate spending. The keynesian cross is an attempt to model this insight. Put another way, keynesians believe that ad shocks (that cause ad to be too low or high) are the primary drivers of the business cycle. Lastly, the is curve plots the relationship between the real interest rate (r) and the level of real income (y) that arises when the market for goods and services is in equilibrium. The keynesian cross can prove useful in deriving the is curve. Lets look at a simple example, imagine that the following equations describe our economy: Planned expenditure, e = c + i + g.
