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1、Chapter 23The Keynesian Framework and the ISLM Model 2005 Pearson Education Canada Inc.Determination of OutputKeynesian ISLM Model assumes price level is fixedAggregate DemandYad=C+I+G+NXEquilibriumY=YadConsumption FunctionC=a+(mpc YD)Investment1.Fixed investment2.Inventory investmentOnly planned in
2、vestment is included in Yad 2005 Pearson Education Canada Inc.2Consumption Function 2005 Pearson Education Canada Inc.3Keynesian Cross DiagramAssume G=0,NX=0,T=0Yad=C+I=200+.5Y+300=500+.5YEquilibrium:1.When Y Y*,Iu 0 Y to Y*2.When Y Y*,Iu Yad Y to ISLeft of IS:Y Yad Y to IS 2005 Pearson Education Ca
3、nada Inc.12LM CurveLM curve1.Y,Md,i Points 1,2,3 in figure2.Right of LM:excess Md,i to LMLeft of LM:excess Ms,i to LM 2005 Pearson Education Canada Inc.13ISLM ModelPoint E,equilibrium where Y=Yad(IS)and Md=M s(LM)At other points like A,B,C,D,one of two markets is not in equilibrium and arrows mark movement towards point E14 2005 Pearson Education Canada Inc.