Introduction

In this chapter we continue to build the Keynesian prototype model of chapter 4 on a firmer and more general basis. We will find that the more general model of this chapter, at one and the same time, avoids the separation into three types of comparative static analysis of the IS–LM equilibrium part of the model (section 4.2) and also avoids the ultra short-run stability problems observed in section 4.3.

We have already extended the Keynesian prototype model of chapter 4, for wage taxation, technical change, average inflation, and a more refined concept of forward-looking behavior, the so-called p*-concept (see appendix 2 of chapter 4), and in chapter 5 by allowing for smooth factor substitution. Although these extensions are all important from an empirical point of view, we consider them as secondary as far as the conceptual issue of building a proper Keynesian model of monetary growth is concerned. This is also obvious from the fact that these extensions can be applied to all three of the general prototype models of this book (chapters 2–4) in a uniform way.

In the present chapter we now show how the simple goods-market disequilibrium approach of the Keynes–Wicksell model of chapter 3 can be integrated into the Keynesian, or IS–LM, model of monetary growth, still based on goods-market equilibrium, in chapter 4.