February 25 Lecture Notes: Full-Employment Flexible-Price Model: Equilibrium
- Components of Aggregate Demand
- Equilibrium through the Flow of Funds
- In the Open Economy
- Comparative Statics as a Method of Analysis
Last time we had our circular flow of economic activity...
We took that and looked at the "flow of funds" through financial markets piece...
And that gave us our clue as to what happens in the economy in order to guide the flow of demand/production into its C, I, G, NX channels...
Supply and demand in the flow of funds through financial markets pushes the interest rate up and down, and so keeps the economy in equilibrium--with the equilibrium level of investment changing in reponse to changes in government policy and in economic conditions...
Take a look, first, at the closed-economy case...
The open-economy case is more complicated: r -> e -> X as well as r -> I...
Example: an increase in the propensity to import accompanied by a cut in taxes...
In the real world things are more complicated still: J-curve
- Extra reading: Paul Krugman quoting St. Augustine
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