Lecture Tuesday 7 Sep Flashcards
What does the (neo) classical explanation of the short run say?
Adjustments in prices would automatically demand tend to the full employment level in the long run.
This is a self-correcting process which means that when demand is greater than supply, prices rise until demand equals supply. When supply is greater than demand, prices drop until demand equals supply.
What does Keynes say?
Prices are preset and the adjustment comes from demand. In the short run, firms meet demand for products at fixed prices
What is planned aggregate expenditure?
This is the planned total spending on final goods and services
Spending, in the short run, may not be sufficient to support a _______ level of output
normal
Recessionary gaps are caused by insufficient _______ spending
aggregate
What are the four components of planned aggregate expenditure?
- consumption
- planned investment
- government spending
- net exports
Define consumption component of PAE
This is consumption of goods (durable and non-durable) and services
Define planned investment component of PAE
Investment is the spending by domestic firms on new capital goods such as office buildings, factories and equipment. Spending on new houses and apartment buildings and increases in inventories are all part of investment.
Planned investment is the firm’s planned investment
Define the government spending component of PAE
This is purchases by the government on goods and services such as new schools and hospitals, roads and employee wages.
Define the net export component of PAE?
exports - imports
What is the equation for planned aggregate investment?
PAE = C + I^P + G + NX
Components of planned aggregate expenditure can be decomposed into what two types of expenditure?
- autonomous
- induced
Define autonomous expenditure
These are components of PAE that don’t change when output (income) changes
What are the four examples of autonomous expenditure?
- planned investment
- government purchases or spending
- exports
- components of consumption and imports that are not influenced by output
Define induced expenditure
these are components of PAE that change when output (income) changes; specifically, consumption and import expenditure that vary with output
Which are the two examples of induced expenditure?
- consumption
2. imports
What makes up consumption?
autonomous consumption and induced consumption (mpc x Yd)
Induced consumption is given by mpc x Yd. What do these mean?
mpc is the marginal propensity to consume and Yd is disposable income
What makes up imports?
autonomous imports and induced imports (m x Y)
Induced imports is given by m x Y. What do these mean?
m is the marginal propensity to import and Y is the output/income
In the Keynesian model, output is determined by what?
PAE
prices are preset
Actual expenditures may not always be equal to PAE.However, what components of PAE do we assume panned = actual?
C
G
NX
Which component of PAE do we say that actual does not = planned? Why is this?
planned investment may not equal actual investment since unsold inventories are included in actual investment (I).
What causes inventories to be larger than expected?
actual sales are less than expected
What causes inventories to be smaller than expected?
if actual sales are greater than expected
Actual aggregate expenditure (Y) is always equal to what?
real GDP
