.

Lecture 87
Eco-104 (5) (chap 10, Arnold)
A Mi Keynesian Macroeconomies e Economie
Instability
A critique of the self-Regulating Economy
1 classical Theory faces problem. Not very infrequent
depression en the last quarter of 19th century a first
quarter of 20th Century CE,
Great sepression in the last quarter of 1929. Faith in
classical Economies shattered. Four classical
position says how holds; Wages, prices and interst
rates are perfectly flexible; The Economy's
self regulating, and Laissez fause is the right
principle. 2. Keynes & Says low in a money economy
classical Econonests - If et Then st supply of
cnot all of the funds i inferest rate & It will rise by some
extent. e) Agg, Demand (planned) z Agg. Supply
Keynes - Neither s nor I ; very sensitive to change of
income. saring a mostly on income,
It host of faktors - very volatile & unpredictable 3.
classical Economists If y<%, Ase curve shifts
downward and if yoin, Asc curre
whift upward. We p would change and Keynes w is not
perfectly flexible in the
short-ran. Trade Union pressuse .
1 P is not perfectly flexble Imperfed market. W
e
PT
I
CRASI
SRASE
wr will be adrien

Economy'
û
stuck at Y, and L as s
A T Dill
ADCA li in
" Lo Yr Ynr.
o
AD falls
3. Rate of Adjustment in Labork Market -
classical classicalists - Very quick Reasons ? &
Assumptions Kaynesian - Quite slow to host of
reasons,
Market imperfections, Labour union, Imphat and
Explicit wage Contract, Menu cost, Insiders
Govt set minimom Wage & Maximem prece
Liquidity Trap! 4. Simple Keynesian Model: TE-TP
Franewark
& AD- As Framework.
TE-TP Framework Assumptions 6 f, w, pemain
constant (for exposition
purposes we may allow or to charge) (2 No foreign
sector (for the sake of convenience)
& Monetary side of the economy is - sidetracked (for
the sake of convenience) 1 supply plays a passine role.
ITP

I TE (planned) = ct I +A
CD = Overproduction AB= under a
production
450/

0
0 Y PEYZ Ve may be or may not be the same as full
employment onput
How we have equilibrium in product market

5. Consumption function
Concept of disposable income.ld
Ape, MPC (e Vade A ?
APS, MPS (S/N), (A3/A)(d)
a - Autonomous Consumption cs eld - Induced
consumption
e caters)

s
(-a +(1-2) Yd)

O A=0A LM = RS
8
Mpe- A so, as id ↑ MPC &

Concept of multiplier Assumptions Multiplier = tumpe =

MPS
If Mpe=18, Then multiplier is 1.8
25,=m Al Al x m. AY = 4a x m
AY = AG x m 7. How multiplier works 8. Multiplier value
in reality

P-tax
емес
I. Derivation of TE creve
c= det eld , T = T, I = I , RER
- gorts transfer expendid Co Cant, conse) TE = CA It G
= (Cotīt Ğ ) te (Y-T+R)

YE & TE at TE = (cotît a ) t e (TR)

Ye (1-1) = (cot. I + C)- eT + EŘ different VE = (cot It G)-
etter
ante tres en el terreno aze
1-C
mil
10. ADA AS Framework
AD eurre shifts co rises by A.C. AD shifts to right by the
Alo ī „ A
1 9 9. by A1 Ġ
4
s by AG 7 a • 4 1 0 3 to left by e AT
Inlet It
TEAT

I ASC
AD, AS A
1. shift of AD Curve & impact on output
se vertical segment ADE, ADC, APELI
AD Extreme
5 Kagresian segment
- Y o % 7, Y Yn
- ADCU
horizontal
-ADlz
position,