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(1+r-d)I t

Capital accumulation with a fixed rate of investment. Total investment (capital) grows until new investment plus natural growth from existing investment just equals depreciation of capital stock. The inflow equals the outflow. I t+1. I t+1 =(1+r-d)I t + I N. (1+r)I t. (1+r-d)I t.

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(1+r-d)I t

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  1. Capital accumulation with a fixed rate of investment. Total investment (capital) grows until new investment plus natural growth from existing investment just equals depreciation of capital stock. The inflow equals the outflow.

  2. It+1 It+1 =(1+r-d)It+ IN (1+r)It (1+r-d)It It= It+1 so (d-r)It = IN It

  3. K L It+1 (1+r)It (1+r-d)It It= It+1 so (d-r)It = IN It

  4. Supply side adjustments in response to a fall in aggregate demand.

  5. aggregate demand falls falling prices stimulate demand and increase real wages causing unemployment unemployment causes money wages to fall to return to potential GDP prices fall to unload inventory inventory buildup labor required to meet new demand

  6. Supply side adjustments in response to an increase in aggregate demand.

  7. aggregate demand increase increasing prices reduce demand and decrease real wages causing over employment over employment causes money wages to increase to return to potential GDP prices increase due to reduced inventory inventory depletion labor required to meet new demand

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