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The Simple Keynesian Model in an IS/MP World

If the central bank holds the interest rate constant (horizontal MP) and the IA curve is horizontal, an investment shock produces the Simple Keynesian Model outcome.  Savings has to increase by the increase in investment, causing a multiplier effect on income.  Velocity just free wheels. 

Aggregate demand is Y = C + I + G, which is not a function of P.  The equation of exchange is not relevant, and the aggregate demand curve is vertical.


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