Chapter 12 - Aggregate Demand in Keynesian Analysis Flashcards
Recessionary gap
Equilibrium at a level of output below potential GDP because AD falls
Inflationary gap
Equilibrium at a level of output above potential GDP because AD rises
3 factors that affect consumption
Disposable income, expected future income, wealth or credit
Disposable income
Income after taxes
Investment expenditure
Spending on new capital goods
Four categories of investment
Producer’s durable equipment and software, new nonresidential structures, changes in inventories, and residential structures
2 factors that affect investment
Expectations of future profits and interest rates
Things that can be affecting through government spending
investment and consumption can be influenced, policies can be put in place to stimulate the economy in recession
2 factors that cause a shift in exports and imports
Changes in relative growth rates between countries and changes in relative prices between countries
2 building blocks of the Keynesian view of recession
AD is not always high enough to provide firms with an incentive to hire enough workers to reach full employment
The macroeconomy may adjust only slowly to shifts in aggregate demand because of sticky wages and prices
Stick wages and prices
Do not respond to decreases or increases in demand
Coordination argument
Downward wage and price flexibility requires perfect information about the level of lower compensation acceptable to other laborers and market participants
Expenditure multipler equation
Change in real GDP / Change in spending > 1
Expenditure multiplier definition
A change in autonomous spending causes a more than proportionate change in real GDP
Macroeconomic externality
When what happens at the macro level is different from and inferior to what happens at the micro level
Menu costs
Cost of changing prices
Contractionary fiscal policy
Tax increases or cuts in government spending designed to decrease aggregate demand and reduce inflationary pressures
Expansionary fiscal policy
Tax cuts or increases in government spending designed to stimulate aggregate demand and move the economy out of recession
Philips curve
Tradeoff between unemployment and inflation
Keynesian view of the Philips curve
It should slope down so that higher unemployment means lower inflation, and vice versa
Keynesian prescription for stabilizing the economy
Government intervention at the macroeconomic level (increasing aggregate demand when private demand falls and decreasing aggregate demand when private demand rises)
