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Aggregate Expenditure

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Aggregate

Expenditure

New Keynesian Cross

(Governs determination of the actual markup. Assumes PIH)

C(N(Y,K,Z),λ)+I+G

45°

Y

Aggregate

Expenditure

Equilibrium Output When I=0

C(N,λ)+G

45°

Y

Y

–

The Net Rental Rate Curve

(Adjusted for a Small Investment Smoothing Parameter j)

r

(dI/dt)e=0

↕

r=[α/(1-α)](WN/K)(I/δK)-j –δ

(dI/dt)e =0

N=N(Y,K,Z)

W=–UN/UC = W(N(Y,K,Z),λ)

r=0–

(dI/dt)e >0

(dI/dt)e <0

Y

Y

–

(I=0)

r

Short Run Equilibria

MP

dI/dt=0

r=0–

–πe

Y

Y

–

(I=0)

r

Unexpected Monetary Contraction

MP

dI/dt=0

r=0–

–π

Y

Y

–

(I=0)

r

Expected Deflation

MP

dI/dt=0

–π

r=0–

Y

Y

–

(I=0)

Rise in the Marginal Value of Wealth λ

(Raising G Does Roughly the Reverse)

r

MP

dI/dt=0

–π

r=0–

Y

Y

–

(I=0)

Beginning of Monetary Restoration

(Eventual Recovery Expected)

r

MP

dI/dt=0

–π

r=0–

Y

Y

–

(I=0)

Continued Monetary Restoration

r

MP

dI/dt=0

–π

r=0–

Y

Y

–

(I=0)

r

Completed Monetary Restoration

MP

dI/dt=0

•

r=0–

–π

Y

Y

–

(I=0)