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Y = YR P
t t t
Relevance of inflation:
During inflation, not all prices and wages rise at the same
rate. Thus, inflation affects distribution of income.
Inflation creates distortions in the economy that leads to
undertainty
THE DEMAND FOR GOODS
Z = C + I + G + X – IM, the total demand for goods
C = C (YD), the Keynesian consumption function
C = c0 + c1 YD, in linear form, where YD = Y – T
Determination of equilibrium output:
Z = c0 + c1 (Y – T) + I + G, total demand
Y = c0 + c1 (Y – T) + I + G at equilibrium
Y = 1/(1-c1) [ c0 + I + G – c1 T] equilibrium condition