ECON 330D2 Chapter Notes - Chapter 12: Real Interest Rate, Aggregate Supply, Aggregate Demand

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The primary feature that makes a keynesian macroeconomic model different is that some prices and wages aren"t completely flexible- sticky. The new keynesian model is essentially identical to the monetary intertemporal model except that price level is not sufficiently flexible for the goods market to clear in the short run. In contrast to the monetary intertemporal model (mim), the new keynesian model (nk) will have the property that money isn"t neutral. When the monetary authority increases money supply, there will be an increase in aggregate output and employment. Given the failure of the labour market to clear, the nk sticky wage model will have different properties than mim. Keynesian strongly believe that the government should play an active role in the economy, through the monetary and fiscal policy. When the monetary authority increases the money supply, there will be an increase in aggregate output and employment.

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