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To save or to consume: linking growth theory with the Keynesian Model

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  • Kwok, Yun-kwong

Abstract

In the neoclassical growth theory, higher saving rate gives rise to higher output per capita. However, in the Keynesian model, higher saving rate causes lower consumption, which may lead to a recession. Students may ask, "Should we save or should we consume?" In most of the macroeconomics textbooks, economic growth and Keynesian economics are in separate, sometimes unsequential, chapters. The connection between the short run and the long run is not apparent. The author builds a bridge between the neoclassical growth theory and the Keynesian model. He links the Solow diagram and the IS-LM curves and depicts the short-run to long-run transition of the economy after changes in saving and other macroeconomic policies.
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Suggested Citation

  • Kwok, Yun-kwong, 2006. "To save or to consume: linking growth theory with the Keynesian Model," Working Papers eco_2006_28, Deakin University, Department of Economics.
  • Handle: RePEc:dkn:econwp:eco_2006_28
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    Keywords

    Keynesian model; medium-run adjustment; neoclassical growth theory;

    JEL classification:

    • A2 - General Economics and Teaching - - Economic Education and Teaching of Economics
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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