Macro Economics Final Exam Flashcards
autonomous consumption
Consumption that is independent of the level of disposable income.
aggregate expenditures function (AE)
The function that represents total spending in an economy at a given level of real disposable income.
autonomous expenditure
Spending that does not vary with the current level of disposable income.
classical economists
A group of economists whose theory dominated economic thinking from the 1770s to the Great Depression. They believed recessions would naturally cure themselves because the price system would automatically restore full employment.
consumption function
The graph or table that shows the amount households spend for goods and services at different levels of disposable income.
dissaving
The amount by which personal consumption expenditures exceed disposable income.
investment demand curve
The curve that shows the amount businesses spend for investment goods at different possible rates of interest.
John Maynard Keynes
British economist (1883–1946) whose influential work offered an explanation of the Great Depression and suggested, as a cure, that the government should play an active role in the economy.
marginal propensity to consume (MPC)
The change in consumption resulting from a given change in real disposable income.
marginal propensity to save (MPS)
The change in saving resulting from a given change in real disposable income.
saving
The part of disposable income households do not spend for consumer goods and services.
Say’s Law
The theory that supply creates its own demand.
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 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