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Under the usual assumption of perfect
competition, we have money being neutral and changes in
nominal aggregate demand cannot affect the real economic
variables. If so, a financial crisis cannot be very
important. However, the real world is characterized more
by non-perfect competition when changes in nominal
demand can affect real variables. This paper shows the
important differences and explains the crux of these
differences from both the demand and cost sides. It also
provides a simplified general-equilibrium analysis of
the economy and shows that, by concentrating on a
representative firm and on how this firm is affected by
macro variables and simplified interaction with other
firms, macro analysis of the economy without assuming
perfect competition is manageable with more realistic
and richer results.
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