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Suppose that, given the level of technology and our resource base, our economy has the potential to produce output (and income) equal to 5,100.
Suppose that, given the level of technology and our resource base, our economy has the potential to produce output (and income) equal to 5,100. Suppose further, that if the economy is shocked away from this level of potential output, income (Y) and interest rates (R) adjust rather quickly to levels that re-equilibrate both the real sector of the economy (Y = C + I + G + X) and the financial sector (MS = MD). In response to a shock, however, prices tend to stick where they are for a year before beginning to adjust.
In the real sector of the economy, planned spending is as follows:
