Let us consider a concrete example. According to the Keynesian model, an increase in G will increase Y and reduce unemployment. In the classical model, an increase in G will have no effect at all on Y and unemployment. In the neo-classical synthesis, an increase in G will create a temporary increase in Y but Y will return to its original value after some time.
The main difference between the cross model and the IS- LM model is that the nominal interest rate is exogenous in the cross model but endogenous in the IS-LM model. In this chapter we will explain how the nominal interest rate is determined in the IS- LM.
In 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".
Describe the main characteristics of what we now call the classical model and how the macroeconomic variables are determined in this model. As discussed in the previous section, we focus on the cycles and all the components included in the GDP (consumption, investment, imports and exports) are variables where the trend has been removed.
Using these models we can, for example, analyze what happens when the government increases consumption, when the central bank increases the target interest rate and when domestically produced goods do well in foreign markets. We can also understand important observations of the economy, such as cyclical fluctuations in growth, correlation between unemployment and inflation and the relationship between interest rates and foreign exchange rates.
Central banks have a monopoly on issuing the national currency, and the primary responsibility of a central bank is to maintain a stable national currency for a country (or a stable common currency for a currency union). Stability is sometimes specified in terms of inflation and / or growth rate in the money supply.
Before discussing macroeconomic models we must define what we mean by money. Money has a long and interesting history and an understanding of how we came to use money is useful for any macro economist. Unfortunately, there is not enough space to describe how money was "invented" and how it evolved over time. There are, however, many excellent descriptions on the Internet.
In macroeconomics, we are normally not interested in the wage for a particular individual but in the average wage for all employed individuals. This average is called the wage level but since we typically only care about the wage level, we will almost always use wage when we actually mean the wage level. Thus, a statement such as "wages increase" should not be interpreted as all wages increasing, but rather that the average is increasing.
Unemployment Classification
Economists sometimes distinguish between different types of unemployment. There are many different ways of classifying unemployment but the following is quite common.
• Frictional unemployment. Individuals that are temporarily unemployed while transiting between jobs or just entering the labour market. This kind is typically short in duration but always present in a market economy.
By capital we typically mean manufactured goods that are used to produce other goods and services but are not used up in the production process (such as machines and computers). Sometimes we use the term fixed capital instead of capital to distinguish capital from financial capital, which consists of bank deposits, stocks, bonds and other assets.
