Simple Keynes Model Assumptions

Here are some notes for a simple model of Keynes. Note that is NOT the standard Keynesian model that is in all the textbooks (chapter 12 in Williamson's Third Edition). This model allows aggregate demand to affect the economy. When aggregate demand affects the economy then financial frictions can have real effects on the economy. This is at the heart of Keynes' Theory in The General Theory, not sticky nominal wages. The sticky nominal wages are just an assumption so that the financial frictions and investor psychology can affect the economy. For this last point see the new and very intersting book by Akerlof and Shiller: Animal Spirits. We will be talking about this in class on Tuesday.