Keynesian Economics

Question 1

Classical Economics

Answer 1

The belief that is based on Say’s law. It has very flexible prices and the economy will be able to regulate itself.

Question 2

Say’s Law

Answer 2

A law stating that supply creates own demand, which in theory regulates the economy automatically.

Question 3

Flexible Prices and Wages

Answer 3

Price levels respond to any shift of the curves. Only in classical range.

Question 4

Internal Fluctuations

Answer 4

events like saving causes the leaks in the economy.

Question 5

External Fluctuations

Answer 5

War, trade issues etc.

Question 6

Keynesian Economics

Answer 6

The economy when in recession needs a government acting as a buffer.

Question 7

Disposable Income

Answer 7

The income left after accounting taxes. It is the money used for spending and saving.

Question 8

Aggregate Expenditures

Answer 8

The total consumption that our country uses that go towards GDP.

Question 9

Average propensity to save

Answer 9

The amount saved compared to income. Saving/income

Question 10

Average propensity to consume

Answer 10

The amount consumed compared to total disposable income.

Question 11

Marginal Propensity to save

Answer 11

The proportion of change in income save. dS/dI

Question 12

Marginal Propensity to consume

Answer 12

The proportion of change in income consumption. dC/dI These do not typically change when AE changes.

Question 13

GDP Multiplier

Answer 13

How much the economy will change if one value in the GDP rises or falls.

Question 14

Dissavings

Answer 14

Spending more than current incomes. Is possible due to borrowing.

Question 15

Full employment

Answer 15

Utilizing all resources and labour force to reach the potential GDP.

Question 16

Inflationary Gap

Answer 16

When the AE equilibrium point is greater than full employment.

Question 17

Recessionary Gap

Answer 17

When the AE eq point is less than the FE.

Question 18

Balanced Budget Multiplier

Answer 18

Measures aggregate production triggered by change in taxes from the government.

Question 19

Shortcomings of AE model

Answer 19

Does not illustrate price level changes
Ignores most demand pull inflation
Limits real GDP to FE
No Cost Push inflation
No self correcting.

Question 20

AD Curve (Slope)

Answer 20

Real output that buyers want to buy at each level.
Real Balances: At high prices, the purchasing power is low and people are better off saving.
Interest Rate: Higher prices increases demand for money
Foreign Purchases: Expensive goods cause more input goods to be bought.

Question 21

AD Determinants

Answer 21

Consumer Spending
Wealth
Expectations
Debt
Taxes
Investment Spending
Expected returns (Unused capital, business taxes, business expectations)
Govt Spending
Exports

Question 22

AS Determinants

Answer 22

Business expectations
INVESTMENT
Taxes
Abundance or Shortage of Resources
PRODUCTIVITY

Question 23

LRAS vs SRAS

Answer 23

SR is where the economy is producing now, while LR is the full employment.

Question 24

Fiscal Policy

Answer 24

A way in which the government controls and regulates the economy by controlling consumption and taxes.

Question 25

Progressive Tax

Answer 25

A taxing system where the taxes get progressively larger with increasing GDP so that way the economy can automatically slow down its decline or growth at the far ends.