Y

AggregateExpenditure

45°

C(N(Y,K,Z),λ)+I+G

New Keynesian Cross(Governs determination of the actual markup. Assumes PIH)

Y

AggregateExpenditure

45°

C(N,λ)+G

Equilibrium Output When I=0

Y–

Y

r

(dI/dt)e =0

(dI/dt)e=0 ↕r=[α/(1-α)](WN/K)(I/δK)-j –δ

The Net Rental Rate Curve

(Adjusted for a Small Investment Smoothing Parameter j)

W=–UN/UC = W(N(Y,K,Z),λ)

N=N(Y,K,Z)

(dI/dt)e >0

(dI/dt)e <0

Y –

(I=0)

r=0–

Y

r

dI/dt=0

Short Run Equilibria

Y –

(I=0)

MP

–πe

r=0–

Y

r

dI/dt=0

Unexpected Monetary Contraction

Y –

(I=0)

MP

–πr=0–

Y

r

dI/dt=0

Expected Deflation

Y –

(I=0)

MP

–πr=0–

Y

r

dI/dt=0

Rise in the Marginal Value of Wealth λ(Raising G Does Roughly the Reverse)

Y –

(I=0)

MP

–πr=0–

Y

r

dI/dt=0

Beginning of Monetary Restoration (Eventual Recovery Expected)

Y –

(I=0)

MP

–πr=0–

Y

r

dI/dt=0

Continued Monetary Restoration

Y –

(I=0)

MP

–πr=0–

Y

r

dI/dt=0

Completed Monetary Restoration

Y –

(I=0)

MP

–πr=0–

•