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## Keynesian cross model## Introduction## The Keynesian modelIn this chapter we will look at the Keynesian cross model. This model is a simple version of what we call the "complete Keynesian model" or simply the Keynesian model. The Keynesian model has as its origin the writings of John Maynard Keynes in the 1930s, particularly the book "The general theory of Employment, Interest, and Money". Although this book was written as a criticism of the classical model, the similarities between the Keynesian model and the classical model are definitely greater than the differences. Lets point out the three most important differences directly: • Say’s Law does not apply in the Keynesian model. • The quantity theory of money does not apply in the Keynesian model. • The nominal wage level Remember that is constant.W The Keynesian model is slightly more complicated than the classic model, and it is developed in four stages by analyzing four separate models. Each model has, however, a value in itself. The models we will consider and the major characteristics of each are: • • is endogenous.R • and P are endogenous.R • and P are endogenous.R Once we have developed the full Keynesian model, we will combine it with the clasmodel which will lead to the neoclassical synthesis. The final chapter covers the Mundell-Fleming model - an extension of the neoclassical synthesis to an open economy where we also analyze the exchange rate. ## Summary of the cross modelThe following list summarizes the cross model and relates it to the classical model: • is exogenous in the cross model (W/P is exogenous in all the Keynesian models and W is exogenous in cross model). The determination of P is very different from the classical model, see Section 11.4.4.L • = Ys Again, we always remove any trend in GDP and its components.f(L, K). • • is given in the cross model.P • Y.• in the classical model. In the Keynesian model it is exogenous.r • Government spending (G) is exogenous but the net tax which means that government savings will be endogenous (SG(Y)= Y - G).NT(Y) • Exports (X) is exogenous, as it is in the classical model, but imports (Im) is endogenous. Imports will also be a function of - X and Im(Y) = SR(Y) - X).Im(Y) • Household savings and total savings were functions of the real interest rate in the classical model. In the cross model they are functions of • The real interest rate is exogenous in cross model. This follows by the fact that the nominal interest rate is exogenous and prices are constant (7re must be zero, and We can divide our analysis of the cross model into three parts: • • • |

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