Keynesian Cross Flashcards
Define aggregate expenditure.
Aggregate expenditure is the sum of all planned or voluntary spending on domestically produced goods and services
What is the difference between exogenous and endogenous?
Exogenous is something generated from outside the model, where as endogenous will be explained within the model
Is G, NX and I endogenous or exogenous?
Exogenous
What is the implication of G, NX and I being exogenous?
We can assume them and keep them as a constant
Define marginal propensity to consumer.
The marginal propensity to consumer says by how much consumption rises if income rises by one unit
What is C equal to? And why?
C = cY, you only want to consumer a proportion of your income
What is the consumption function?
C = cY
What is the aggregate expenditure identity using c?
AE = cY + I + G + NX
Define actual expenditure.
Actual expenditure is the sum of all categories of demand, including unplanned investment
How can you derive the aggregate expenditure line on a graph?
Add horizontal lines for each of the assumed constant variable, I, G and NX and then draw a straight line outwards from the top point showing cY
What two curves does the Keynesian cross show?
Aggregate expenditure, AE, and actual expenditure, AE = Y
Where is the equilbrium shown on the Keynesian cross?
Where the two lines intercept
Draw a Keynesian cross.
Picture
How is the aggregate expenditure line affected if you increase government expenditure?
With with shifted upwards by ∆G
If you increase G, why is ∆Y > ∆G?
The multiplier effect
Explain why if you increase ΔG by 1, however the change in income is greater.
The additional unit of G by 1 unit it will shift the AE line upwards by one unit.
Which increases the old income level by one unit
Consumers plan to spend a fraction c for their first round income increase
Which increases the income by c
This process continues and you keep adding c^n onto the income
And so by increasing G by on unit you will have increased Y by 1 + c + c^2 + c^3 ….
What is the ∆Y multiplier?
1/1-c
Deine multiplier.
The multiplier measures the income change resulting from a one-unit increase in autonomous expenditure
What is the tax equation?
T = tY
Define disposable income.
Disposable income is the part of income left to households after the payment of taxes
What does t stand for?
The marginal and average income tax rate
Define marginal income tax rate.
The marginal income tax rate says by how much taxes rise if income rises by one unit
Define average income tax rate.
The average income tax rate gives the share of taxes on income on average
Name three things proportional to income?
Consumption, taxes and imports
What is the import function?
IM = mY
If we assume consumption, taxes and imports are proportional to income what s the equation for AE?
AE = [c(1-t) - m]Y + I + G + EX
How does using this equation: AE = [c(1-t) - m]Y + I + G + EX change the slope of the AE?
Flatter
If we use this equation AE = [c(1-t) - m]Y + I + G + EX how does the multiplier change?
1/([c(1-t) - m])
How can you find the multiplier given the AE equation?
Rearrange for Y and then differentiate
Draw a graph for the investment against expected return.
Picture
What is the investment function?
I = Ī - bi
What does Ī stand for?
The part of investment which depends if the person is optimistic or pessimistic - expected further income
What does b stand for?
Sensitivity of investment
What does i stand for?
Interest rate
On a graph of investment against expected return would you partake in investments above or below the interest rate?
Above
