An Introduction to Economic Dynamics

7 EXPECTATION DYNAMICS AND HYPERINFLATION

DOI: 10.4324/9780429324406-7

In Chapter 4, we studied a simple Keynesian model of macroeconomic income determination. The economy was viewed as an ’aggregate’ entity and was analysed using the aggregate income-expenditure relation. While the model helped us to derive the equilibrium level of output, there are couple of questions that were not addressed. First, there is no story of what happens to prices (and inflation) in the model. Second, the aggregate analysis does not tell us how individual agents adapt their behaviour for any policy changes. For instance, an increase in taxes can impact on both the current and future spending plans of consumers and investors. Therefore, policy changes impact ...