L1 - The Investment Saving Relation Flashcards
What is the Keynesian IS relation in the context of goods market equilibrium?
The IS (Investment-Saving) relation in Keynesian economics states that for the goods market to be in equilibrium, investment must equal the sum of private and public saving.
How is private saving defined and calculated?
Private saving is the portion of disposable income that is not spent on consumption. It is calculated as S = Y - T - C, where S is private saving, Y is income, T is taxes, and C is consumption.
What is public saving and when is it considered a surplus or deficit?
Public saving is the difference between taxes and government spending. A budget surplus occurs if taxes exceed government spending, and a budget deficit occurs if the opposite is true.
How are consumption and saving decisions related?
Consumption and saving decisions are connected. Given disposable income, any amount not used for consumption is automatically saved. This relationship is described by the consumption behavior equation C = c0 + c1(Y - T).
What does the propensity to save imply?
The propensity to save is shown by 1 - c1, where c1 is the marginal propensity to consume. It indicates how much of each additional unit of disposable income is saved.
How is the equilibrium output expressed in the saving approach?
The equilibrium output from the saving perspective is expressed as Y = 1/(1 - c1) [c0 + I + G - c1T], consistent with the output equation derived from the consumption side.
What are the two equivalent ways of stating the condition for equilibrium in the goods market?
The two equivalent conditions for equilibrium in the goods market are: Production equals Demand, and Investment equals Saving.
How does the division of disposable income affect economic equilibrium?
The way consumers divide their disposable income between consumption and saving affects the equilibrium level of output in the economy, which impacts overall investment levels and economic equilibrium.
Why must saving and investment align for economic equilibrium?
Saving and investment must align for equilibrium to be achieved, adhering to a fundamental Keynesian principle that ensures all income is either consumed or saved, which in turn funds investment.
