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Nobel Prize winner: Hicks/Arrow PART 2 (Hicks IS/LM model (Relation to…
Nobel Prize winner: Hicks/Arrow PART 2
Hicks IS/LM model
Policy implications:
Fiscal policy: shifts IS curve
Monetary policy: shifts LM curve
Hicks IS/LM model
Relation to Keynes:
Integrated Keynes’ thought in one complete model
Fiscal policy effective to increase output in economy
Relation to Neo-Classicals:
Expansionary monetary policy increases output in economy
Arrow's contributions
1
. General equilibrium theory
Proof existence of competitive equilibrium
2
.Imperfect/asymmetric information in markets
Moral hazard
Adverse selection
Arrow: General equilibrium
Proof of existence of an equilibrium solution
Mathematical expression to common assumptions of
constant/decreasing returns to production
Convex indifference curves
No external effects
Profit/utility maximizing agents
Set of prices exist to make supply equal to demand
Two main theorems of welfare economics:
A competitive equilibrium is a Pareto optimum
Any Pareto optimum can be sustained as a competitive equilibrium