Keynesian Model stuff Flashcards
Spending Multiplier
1/(1-MPC)
Tax multiplier
1 - (spending multiplier)
(taxes) change in AE
Changes in Tax * Tax multiplier
AE =
C + I + G + (x-m)
(Gov. Spending) change in AE
Initial Change in spending * Spending Multiplier
Aggregate Expediture demand curve
CPI on Y-axis and Real GDP on x-axis
Reasons for AE demand curve shape
- Real balances effect
- Interest Rate effect
- Net exports effect
Real balances affect
The impact on total spending (real GDP) caused by the inverse relationship between the price level and the real value of financial assets with fixed nominal value.
Interest rate effect
The impact on total spending (real GDP) caused by the direct relationship between the price level and the interest rate.”
Net exports effect
The impact on total spending (real GDP) caused by the inverse relationship between the price level and the net exports of an economy
Change in AE demand curve
Any change in aggregate expenditures[AE=C+I+G+(x-m) shifts the aggregate demand curve.
Non-price factors AE supply curve
- Resource prices
- Tech Change
- Taxes
- Subsides
- Regulations
shift back in AE supply curve leads to
Cost Push inflation
Shift foward in AE Demand Curve leads to
Demand pull inflation
macroeconomic equilibrium
At macroeconomic equilibrium, sellers neither overestimate nor underestimate the real GDP demanded at the prevailing price level.”
Recessionary Gap
The amount by which the aggregate expenditures curve must be increased to achieve full-employment equilibrium.”
How to reduce recessionary gap
Increase gov. spending or Decrease taxes
