Keynesian Economics Flashcards
What is a country’s potential GDP and how does it compare to the real GDP?
Potential GDP is the total combination of all factors to production (Yp)
Real GDP is the total goods and services actually sold
In Keynesian Economics, what does the AD curve look like and what does the SRAS curve look like?
AD is concave to the axis and downward sloping
SRAS is a vertical line at Potential GDP (Yp)
In Keynesian Economics, what is the main argument between AD, prices and output? What do changes in AD below Yp lead to?
Keynesian argues that AD is volatile and changes in AD will change overall output before price.
They lead to a recessionary gap - when AD shifts below Yp prices will stay the same but output will decrease leading to an increase in unemployment
In Keynesian Economics, what is a recessionary gap?
The fall of AD leads to less output below Yp but at the same price level but with less output and an increase in unemployment
In Keynesian Economics, what is an inflationary gap?
When AD increases above Yp and creates short run demand pull inflation
In Keynesian Economics, what are the three factors that affect consumption? Explain each
Disposable Income - Take-home pay
Expected Future Income - If consumers are optimistic about their future income they will be willing to spend today
Wealth or Credit - When consumers feel their overall wealth is increasing they are willing to borrow against it
If household preference discourages consumption, what happens to the AD curve and the economy in the short run?
The AD curve would shift inward and decrease total output at the current price level.
This would lead to a recessionary gap within the economy due to the increase in unemployment
What is investment expenditure, and what are the four categories of investment expenditure?
Business spending on new capital goods
- Producers durable equipment
- Nonresidential Structures
- Changes in Inventory
- Residential Structures
