Aggregate demand with inflation, Macroeconomics

Assignment Help:

Aggregate demand with inflation

In previous versions of Keynesian model, Components of aggregate demand did not depend on P. In IS-LM and in AS-AD models, investments depended on nominal interest rate R.

We argued that investment in fact relies on the real interest rate r but as R = r when πe = 0, we could make it a function of R.  

When πe no longer is zero and real interest rate r = R - πe, we must write I(r) or I(R - πe). We must also write YD(Y, r) or YD(Y, R - πe). As inflation expectations are exogenous (given), it's still the case that YD relies negatively on R. Please note that if there is an equal increase in expected inflation and in nominal interest rate, real interest rate is unaffected and so is aggregate demand andinvestments.


Related Discussions:- Aggregate demand with inflation

Wage rate increases, A person chooses between leisure and consumption. All ...

A person chooses between leisure and consumption. All of their consumption comes from current income. The utility derived from any combination of leisure and consumption is given b

Evaluation of money, Ask question #Minimum 1 page words accepted#

Ask question #Minimum 1 page words accepted#

Analyse the assumptions of price elasticity, In an article about the financ...

In an article about the financial problems of USAToday,News week reported that the paper was losing about $20 million a year. A Wall Street analyst said that the paper should raise

Hypothetical economy, #C=100+0.8yd G=100 T=0.25y X=150 M=0.25yd 1) What is ...

#C=100+0.8yd G=100 T=0.25y X=150 M=0.25yd 1) What is the level of equilibrium national income? 2) Estimate the budget surplus or deficit at the equilibrium national income. 3) Deri

Accounting system-example ii, ACCOUNTING SYSTEM-EXAMPLE Let us now intr...

ACCOUNTING SYSTEM-EXAMPLE Let us now introduce a complication. There are three firms in the production sector. The Fruit Extracts Company manufactures from raw fruit, fruit ext

Fdi inflows - an appraisal, FDI Inflows - An Appraisal: A comparison o...

FDI Inflows - An Appraisal: A comparison of the magnitude of FDI inflows received by India would appear too small, especially when compared to the inflows received by other co

Write the mass balance equation, Environmental engineers and scientists are...

Environmental engineers and scientists are becoming concerned about pharmaceuticals in the environment. An antibiotic is discharged into a small lake at an influent concentration o

Discuss about real verses nominal gross domestic product, Discuss about rea...

Discuss about real verses nominal gross domestic product. Real verses Nominal Gross Domestic Product: Real Gross Domestic Product: the value of the concluding goods and se

Price level depends on current money supply and future, If the price level ...

If the price level depends on both the current money supply and future expected money supplies, in order to stop a hyperinflation, a central bank may try to establish credibility b

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd