summary of the cross modelthe below list

Question

Summary of the cross model

The below list summarizes the cross model and associates it to classical model: 

• Labor Market: Real wages W/P is exogenous in cross model (W is exogenous in all the Keynesian models and P is exogenous in cross model). Determination of L is very different from the classical model.
• Aggregate supply Y_s is determined by production function Y_s = f (L, K). Again, we always remove any trend in GDP and its components.
• Aggregate demand isn't always equal to the aggregate supply. Say's Law doesn't apply in any of the Keynesian models. Consequently we should describe how aggregate demand and GDP is determined in cross model.
• The Quantity theory of money doesn't apply anymore. Fortunately, we don't need it because P is given in the cross model.
• Consumption was a function of real interest rate in the classical model. In cross model it's a function of Y.
• Investment was also a function of r in classical model. In Keynesian model it's exogenous.
• Government spending (G) is exogenous though net tax NX is endogenous (in the classical model, they were both exogenous). Net tax is presumed to be a function of Y that means government savings will be endogenous (S_G(Y) = NT(Y) - G).
• Exports (X) is exogenous, as it's in the classical model though imports (Im) is endogenous. Imports will also be a function of Y. Net imports and external savings will thus also be endogenous variables (NX(Y) = X - Im(Y) and S_R(Y) = Im(Y) - X).
• Total savings and household savings were functions of the real interest rate in classical model. In the cross model they are functions of Y.
• the real interest rate is exogenous in cross model. This follows by the fact that nominal interest rate is exogenous and prices are constant (p^eshould bezeroandr=R).