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The paper presents a new low complexity design of psycho-acoustic model (PAM), which is the key technology for MPEG-2/4 advanced audio coding (AAC) encoding. The real-time constraint of MPEG AAC leads to a heavy computational bottleneck on today's portable devices. To overcome this problem, design analysis and optimization of PAM are addressed at the algorithmic level. First, the dominant calculation of spreading function is replaced with small look-up tables. Second, modified-discrete-cosine-transform-based (MDCT-based) PAM with block type decision in frequency domain is proposed to reduce the overall AAC encoder complexity and maintain the quality. This technique is different from the traditional methods. The computational complexity of PAM is reduced by 82% in total. The proposed design could be implemented in a real-time MPEG-2/4 AAC stereo encoder at low complexity profile and bit rate 128 kb/s with computational complexity of less than 20 MOPS while maintaining CD quality.