EC140 Lecture Notes - Lecture 1: Real Interest Rate, Aggregate Demand, Phillips Curve

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22 Sep 2016
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The keynesian model describes the economy in the short run when prices are fixed: price level is fixed, aggregate demand determines real gdp. The first macroeconomic model that was based not on price adjustment (microeconomic), but on quantity adjustment to attain equilibrium flow rates of output income, and expenditure. Central problem was deficient demand in the economy ideal production capacity, prices which were stable or falling during the great depression. Impetus for change to macro models came from the perceived breakdown of the unemployment- inflation trade-off, most commonly illustrated with the phillips curve. During the 1970s, models were developed that incorporated. Ex: income rises, increase amount you can spend on consumption goods. Vice versa: price adjustment mechanisms, explicit supply sides. These new, improved macro models synthesized: the keynesian model of the demand side, growth models that addressed long-term supply capacity, aggregate price adjustment similar to that used in phillips curve models.

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