Chapter 10 Keynesian Economics

Question 1

Summarize classical theory

Answer 1

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

Question 2

Summarize Keynes theory

Answer 2

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

Question 3

Keynesian theory is a product of

Answer 3

The Great Depression,which was the worst period of economic decline in the US history.

Question 4

Keynes believes that

Answer 4

Consumption is a function of income [and therefore savings to]. We consume more as our income rises, not as interest rates change.

Question 5

The marginal propensity to consume

Answer 5

Is the proportion of a change in income that is consumed.

Question 6

The marginal propensity to consume and the marginal propensity to save will add up to

Answer 6

One

Question 7

The marginal propensity to consume (MPC)defines

Answer 7

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)

Question 8

The total change in income that occurs from a change in spending is the

Answer 8

Multiplier times the change in spending.

Question 9

Investment is a function of both

Answer 9

Interest rate and business expectations.

It is not necessarily equal to savings.

Question 10

Investment demand is renamed

Answer 10

Marginal efficiency of capital (MEK) by Keynes.

Question 11

What is the most volatile type of spending?

Answer 11

Investment

Question 12

Keynesian do not believe in

Answer 12

Say’s Law.

Question 13

Keynesians Believe that

Answer 13

Goods maybe produced that are not sold.

Question 14

Keynes views businesses as

Answer 14

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.

Question 15

Recessions in the Keynesian world come from

Answer 15

Insufficient aggregate demand and can only end from increase in spending by consumers, businesses or the government.

Question 16

Keynes argued against

Answer 16

Incorporating the long run into economic thinking.

Question 17

Marginal propensity to consume

Answer 17

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)

Question 18

Marginal propensity to save

Answer 18

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)

Question 19

Average propensity to consume

Answer 19

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)

Question 20

Average propensity to save

Answer 20

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)

Question 21

Multiplier

Answer 21

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

Question 22

Marginal efficiency of capital

Answer 22

The extra profit earned due to an extra unit of capital

Question 23

Autonomous consumption

Answer 23

Autonomous consumption is the amount of consumption expenditure that would take place in the short run even if people had no current income.

Question 24

Induced consumption

Answer 24

Induced consumption is the consumption expenditure that is induced by an Increase in disposable income.

Question 25

Average propensity to consume (ACP)

Answer 25

ACP=consumption/ income

Question 26

Marginal propensity to consume ( MCP)

Answer 26

MCP=change in consumption/ change in income

Question 27

Average propensity to save( APS)

Answer 27

APS=Savings / Income

Question 28

Marginal propensity to save ( MPS)

Answer 28

MPS= changes in savings/ changes in income

Question 29

APC+APS=

Answer 29

1

Question 30

MPC+MPS=

Answer 30

1

Question 31

Formula for multiplier (K)=

Answer 31

K = 1/ (1- MPC)