Macro Economics Chapter 08 Power Point Flashcards
Who was John Maynard Keynes?
British economist (1883-1946) who offered an explanation of the Great Depression of the 1930’s
When were the ideas of the classical economists widely accepted?
Prior to the 1930’s
What did the classical economists believe?
The economy is always tending toward a full employment equilibrium
What does Say’s Law say?
Supply creates its own demand.
Why is Say’s Law a full employment theory?
Producers produce goods consumers want and consumers have the money to buy because of the wages they were paid
Under Say’s Law, is unemployment possible?
Yes, but it is a short-lived adjustment period in which wages and prices decline or people voluntarily choose not to work
What is the name of the book Keynes had published in 1936?
The General Theory of Employment, Interest, and Money.
Why did Keynes believe that “supply did not create its own demand”?
Demand can be forever inadequate for an economy to achieve full employment.
What changed people’s mind about Say’s Law?
The Great Depression and the advent of Keynesian economics
What is the essence of Keynesian Economics?
The economy could tend toward a less than full employment equilibrium.
What is the main idea of this chapter?
An explanation of Keynesian economics
What determines demand for goods and services?
Disposable income
What is the consumption function?
A graph that shows the amount households spend for goods and services at different levels of disposable income
What is savings?
Money earned but not spent.
What is dissaving?
The amount by which personal spending exceeds disposable income.
How do people dissave?
By taking money from personal savings
What is autonomous consumption?
Consumption that is independent of the level of disposable income.
What happens when disposable income is zero?
Spending will equal autonomous consumption because households will dissave for basic needs.
What is the marginal propensity to consume (MPC)?
The change in consumption resulting from a change in real disposable income
Why does MPC plus MPS always equal 1?
Because savings is defined as money earned but not spent.
What does Marginal Propensity to Spend plus Marginal Propensity to Consume equal?
MPS + MPC = 1
If MPC changes from .50 to .75 then?
Consumption function shifts from C1 to C2 and People spend more at all levels of real disposable income.
What happens when real disposable income changes?
There is a direct relationship between changes in real disposable income and changes in consumption.
What happens if factors other than income change?
There is a shift in the consumption schedule.
Consumption shifts because of a change in?(Five reasons)
•Expectations•Wealth•Price levels•Interest rates•Stock of durable goods
How do expectations affect the consumption function?
Consumers expectations of things to happen in the future will affect their spending decisions today.
Does wealth affect consumption?
There is a direct relationship between a change in wealth and a change in consumption.
Is there a direct or indirect relationship with the price level affect the consumption function?
There is an indirect relationship between a change in prices and a change in consumption..
Is there an direct or indirect relationship with the interest rate affect the consumption function?
There is an indirect relationship between a change in interest rates and a change in consumption.
How does the stock of durable goods affect the consumption function?
When durable goods are suppressed, like during WWII, afterwards there is an increase in the demand for goods not previously made available.
How does consumption compare with investment?
Consumption is more stable than investment.
According to the classical economists, what determined the level of investment?
The interest rate.
According to Keynes, what determines the level of investment?
Expectations of future profits is the primary factor, along with the level of interest rates.
What is the investment demand curve?
The curve that shows the amount businesses invest at different possible rates of interest.
Why is investment demand unstable?(Five reasons)
•Expectations•Technological change•Capacity utilization•Business taxes•Autonomous reasons
How do expectations affect investment?
Investors are susceptible to moods of optimism and pessimism.
How does technological change affect investment?
New products and new ways of doing things have a big impact on investment decisions.
What happens when capacity utilization is low?
Firms can meet an increase in demand without expanding.
What happens when capacity utilization is high?
Firms must increase investment to meet an increase in demand.
How do business taxes affect investment?
Business decisions depend on the expected after-tax rate of profit.
What is autonomous expenditure?
Spending that does not vary with the current level of disposable income.
What is the aggregate expenditure function?
What is the aggregate expenditure function?
