Chapter 10 Keynesian Economics Flashcards
Summarize classical theory
Savings- Determined by interest rates Investment -Determined by interest rates Say’s Law-Yes Wages and prices -Flexible Centered on -Aggregate supply Recessions- fix themselves
Summarize Keynes theory
Savings-determined by Income Investment - Determined by expectations Say’s Law- No Wages and prices - flexible or not, not important in a recession Centered on - Aggregate demand Recessions- maybe equilibrium
Keynesian theory is a product of
The Great Depression,which was the worst period of economic decline in the US history.
Keynes believes that
Consumption is a function of income [and therefore savings to]. We consume more as our income rises, not as interest rates change.
The marginal propensity to consume
Is the proportion of a change in income that is consumed.
The marginal propensity to consume and the marginal propensity to save will add up to
One
The marginal propensity to consume (MPC)defines
Re-spending in the economy.
Income spent by one person become’s income for another.
This responding continues throughout the economic, limited by the size of the MPC.
The multiplier is equal to 1/(1/MPC)
The total change in income that occurs from a change in spending is the
Multiplier times the change in spending.
Investment is a function of both
Interest rate and business expectations.
It is not necessarily equal to savings.
Investment demand is renamed
Marginal efficiency of capital (MEK) by Keynes.
What is the most volatile type of spending?
Investment
Keynesian do not believe in
Say’s Law.
Keynesians Believe that
Goods maybe produced that are not sold.
Keynes views businesses as
Want to be adjusters not price adjusters .
That is, when required to adjust because of an economic problem, they are more likely to change the amount of labor employed or output produced than to change prices or wages.
Recessions in the Keynesian world come from
Insufficient aggregate demand and can only end from increase in spending by consumers, businesses or the government.
Keynes argued against
Incorporating the long run into economic thinking.
Marginal propensity to consume
The fraction of an increase in disposable income (income after tax) that people plan to spend on domestically produced consumer goods.
Marginal Propensity to Consume
change in how much disposable income spent
- Δ consumption
- always less than one but more than zero
- MPS + MPC = 1
- slope of consumption function
(ΔConsumption) / (ΔDisposable Income)
Marginal propensity to save
Marginal Propensity to Save
change in how much disposable income saved
- Δ savings
- always less than one but more than zero
- MPS + MPC = 1
(ΔSaving) / (ΔDisposable Income)
Average propensity to consume
Average Propensity to Consume
average of how much disposable income spent
- always less than one but more than zero
- APS + APC = 1
(Consumption) / (Disposable Income)
Average propensity to save
Average Propensity to Save
average of how much disposable income saved
- always less than one but more than zero
- APS + APC = 1
(Saving) / (Disposable Income)
Multiplier
The ratio of a change in equilibrium GDP to the change in investment or in any other component of aggregate expenditures or aggregate demand; the number by which a change in any such component must be multiplied to find the resulting change in equilibrium GDP
Multiplier= change in real GDP/initial change in spending
Change in GDP= multiplier x initial change in spending
Marginal efficiency of capital
The extra profit earned due to an extra unit of capital
Autonomous consumption
Autonomous consumption is the amount of consumption expenditure that would take place in the short run even if people had no current income.
Induced consumption
Induced consumption is the consumption expenditure that is induced by an Increase in disposable income.
Average propensity to consume (ACP)
ACP=consumption/ income
Marginal propensity to consume ( MCP)
MCP=change in consumption/ change in income
Average propensity to save( APS)
APS=Savings / Income
Marginal propensity to save ( MPS)
MPS= changes in savings/ changes in income
APC+APS=
1
MPC+MPS=
1
Formula for multiplier (K)=
K = 1/ (1- MPC)
