The Keynesian Model
We now combine the AD theory of Section 5.4 with the Keynesian 15 theory of Section 5.7. The resulting system, which constitutes the Keynesian model, can be written as follows y C y - r,r I y,r g, 4 Here W is, as explained above, a predetermined variable. Furthermore, the policy variables M, g, and r are again set exogenously. Consequently, the system includes as endogenous variables justy, r, n, and P. The four equations 4 , 9 , 11 , and 15 are then adequate in number to determine the values...
The Cagan Model
We are now prepared to advance from steady-state analysis to genuine dynamics, that is, the study of period-to-period variations in the values of a system's exogenous and endogenous variables. As the step is not a trivial one, we shall try to keep matters as simple as possible by initially working with a model in which there are very few variables. Fortunately, it will be possible to study a system that includes only two variables, yet which is useful for the analysis of some actual historical...
Problems Liy
1. Another example of the type considered in Section 8.5 uses equation 29 , and assumes that u, is autocorrelated but now in a different fashion than specified by 33 . Instead, in this example, u, has the moving-average form where is white noise. Find a solution for y, in this case. 2. Consider again the market described in Problem 3 of Chapter 7 but now assume that expectations are formed rationally, that is, pet E,-ipt. Here E,-.xpt E pt ilt-x withii,_i including , q,-u q, 2, Derive a...