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Econ 202 Macroeconomics > Chapter 12: Keynesian Perspective > Flashcards

Chapter 12: Keynesian Perspective Flashcards

1
Q

After what event did Keynesian Economic theory become more mainstream? Why?

A

Great Depression

Instead of letting the economy self-balance, active fiscal policy was used to alleviate weak aggregate demand

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2
Q

How does Neoclassical economics prescribe dealing with a recession?

A

It will self-correct. No action needed. “Hands off” policy approach.

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3
Q

How does Keynesian economics prescribe dealing with a recession?

A

Implement active fiscal and monetary policies

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4
Q

What happens tot he aggregate demand curve in a recession?

A

Shifts left

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5
Q

Person Keynesian economics is named after

A

John Maynard Keynes

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6
Q

Economics theory that markets don’t self-correct quickly, because prices & wages take time to adjust. During recessions it is necessary for the government to get involved by using monetary and fiscal policy to increase output, decrease unemployment.

A

Keynesian Economics

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7
Q

Stagflation

A

When inflation is high, economic growth rate slows, and unemployment remains steadily high

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8
Q

Monetarism

A

Focused on price stability. Money supply should be increased slowly and predictably to allow for steady growth.

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9
Q

Name that economics theory: Focuses on aggregate demand. Firms produce output only if they expect it to sell.

A

Keynesian Economics

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10
Q

Potential Output

A

What can be produced if the economy is operating at maximum (natural) employment

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11
Q

In Keynesian Economics, when AD (aggregate demand) falls, what occurs?

A

Less than full unemployment / recessionary gap. Government should increase spending to boost aggregate demand.

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12
Q

In Keynesian Economics, when AD (aggregate demand) increases, what occurs?

A

Inflation, where demand attempts to push the economy past potential output. Government should decrease spending to ease aggregate demand.

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13
Q

Aggregate Demand

A

Total spending, economy-wide, on domestic goods and services

Consumption + Investment + Government Spending + Net Exports

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14
Q

Durable Goods

A

Things that last and provide value over time

Example: Automobiles

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15
Q

Nondurable Goods

A

Once you consume them, they are gone

Example: Groceries

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16
Q

3 Factors that affect consumption (Keynes)

A
  1. Disposable Income
  2. Expected Future Income
  3. Wealth or Credit
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17
Q

Disposable income

A

Take home pay / income after taxes

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18
Q

How do consumer expectations for the future affect aggregate demand?

A

Optimistic - consume more

News of recession - pull back and spend less

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19
Q

How do people spend beyond their income?

A

Borrowing/credit

20
Q

What will occur to Aggregate Demand (on a graph) if there is a shift towards consumption rather than saving?

A

AD will shift to the right

21
Q

4 Categories of Investment Expenditure

A
  1. Durable equipment/software
  2. Nonresidential structures
  3. Change in inventory
  4. Residential structures
22
Q

How does confident expectation of future profits affect business investment expenditure?

A

Businesses will increase investment

23
Q

How do low interest rates affect investment spending?

A

Increases investment/spending

24
Q

2 Factors that Affect Business Investment Spending

A
  1. Expectation of future profits

2. Interest rates

25
Q

How can the government influence Aggregate Demand?

A
  1. Increasing or decreasing government spending

2. Lowering or raising tax rates

26
Q

Why do sticky wages and prices increase the impact of an economic downturn?

A

The macroeconomy adjusts slowly to shifts in aggregate demand because of wages and prices that do not respond to decreases/increases in demand

27
Q

2 Building Blocks of Keynesian Economics

A
  1. Aggregate demand is not always high enough to incentivize firms to hire enough workers to reach full employment
  2. Sticky wages/prices do not respond to demand shifts
28
Q

What kind of situation and timeframe does Keynesian Economics focus on?

A

Depressions/Recessions
Relative Short Term
Offers policy prescription for minimizing effects of economic downturn

29
Q

What “law” did the Great Depression contradict?

A

Say’s Law that “supply creates its own demand”. There were just as many factories and workers/same supply as before the crash, but not enough demand.

30
Q

Coordination Argument

A

No centralized way to implement coordinated wage reductions in bad economic times, so workers will fight against wage reductions. Keeps wages sticky.

31
Q

Menu Costs

A

Costs of changing prices. Price changes may leave consumers confused or angry.

32
Q

Expenditure Multiplier

A

Measure of how many times Real GDP will be increases/decreased as a result of an autonomous change in aggregate spending in the economy.
(change in Y) / (change in spending) > 1
* Y = RGDP = aggregate demand spending

33
Q

How does an inflationary gap occur?

A

Aggregate demand increases when the economy is already at potential output. AS is already vertical, so any increase in AD leads to a higher price (inflation) but not higher GDP.

34
Q

Marginal Propensity to Consume (MPC)

A

Ratio of Change in Consumption Expenditure (C) to the Change in Disposable Income (DI)
MPC = (change C) / (change DI)

35
Q

How to calculate the expenditure multiplier

A

Expenditure Multiplier = 1 / (1 - MPC)

* MPC = Marginal Propensity to Consume

36
Q

Phillips Curve

A

Inflation and unemployment have a stable and inverse relationship. With economic growth comes inflation, which it turn leads to more jobs and less unemployment.

37
Q

Keynesian Zone

A

Levels of output far below potential in the Aggregate Supply Curve. AS curve is flat. High unemployment, low inflation.

38
Q

Neoclassical Zone

A

Levels of output above potential in the Aggregate Supply Curve. As curve is essentially vertical. Low unemployment, high inflation.

39
Q

Intermediate Zone

A

Between the Keynesian and Neoclassical Zones in the Aggregate Supply Curve

40
Q

Stagflation

A

Unhealthy combination of high inflation and high unemployment. Could not be explained by traditional Keynesian economics.

41
Q

What do Keynesian macroeconomists view as the solution to a recession?

A

Expansionary fiscal policy such as tax cuts to increase consumption, or increased government spending. Shifts the demand curve to the right.

42
Q

Does Keynesian economics require government to set controls on prices, wages, or interest rates?

A

No. It focuses more on aggregate economic demand through government spending and tax cuts.

43
Q

3 Practical Problems with Keynesian solutions

A
  1. government’s ability to estimate GDP
  2. government decision between tax cuts or spending
  3. time lag for government legislation
44
Q

Multiplier Effect

A

An initial increase in spending cycles repeatedly throughout the economy, resulting in a larger impact than the initial dollar spent

45
Q

What occurs in an economy with a high multiplier?

A

Change in aggregate demand is magnified
Economy is unstable
Government policies on expenditure will have large effect

46
Q

What occurs in an economy with a low multiplier?

A

Change in aggregate demand is low
Economy is relatively stable
Government policy has weak effect on expenditures

Econ 202 Macroeconomics (15 decks)

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