The Keynesian Model

Question 1

What does the Keynesian model do

Answer 1

Describe the economy in the very shirt run when prices are fixed

Question 2

Why is there a two way link between aggregate expenditure and real GDP

Answer 2

the components of aggregate expenditure sum to real GDP
Y=C+I+G+X-M

two of the components of aggregate expenditure, consumption and imports are influenced by real GDP

so there is a two way link between real GDP and aggregate expenditure

Question 3

What is the most direct influence of consumption expenditure

Answer 3

Disposable income

Question 4

What is the equation for disposable income

Answer 4

YD=Y-T
Y-aggregate income or real GDP
T-net taxes

Question 5

What the equation for what disposable income is spent on

Answer 5

YD=C+S

Question 6

What is the relationship between consumption expenditure and disposable income

Answer 6

Other things remaining the same, is the consumption function
C=C0+CYD

Question 7

What is the relationship between saving and disposable income

Answer 7

Other things remaining the same, is the saving function
S=S0+SYD

Question 8

What marginal propensity to consume

Answer 8

is the fraction of change in disposable income spent on consumption

Question 9

What’s the equation of MPC

Answer 9

MPC=CHANGE IN C divided by change in YD

Question 10

What is marginal propensity to save

Answer 10

Is the fraction of change in disposable income that is saved

Question 11

How do we calculate MPS

Answer 11

MPS= change in S divided by change in YD

Question 12

What is MPC plus MPS

Answer 12

1

Question 13

What relationship do we use to determine real GDP when price level is fixed

Answer 13

The relationship that consumption expenditure is a function of real GDP because, disposable income changes if real GDP changes or net taxes change .
But it taxes don’t change real GDP is the only influnce on Disposable income

Question 14

What is marginal propensity to import

Answer 14

Is the fraction of an increase in real GDP spent on imports

Question 15

What is induced expenditure

Answer 15

Consumption expenditure minus imports (which varies) with real GDP

Question 16

What is autonomous expenditure

Answer 16

Sum of investment, government expenditure and exports (doesn’t vary with GDP)

Question 17

Is the following statement true or false.
Actual aggregate expenditure is always equal to real GDP

Answer 17

True

Question 18

What is equilibrium expenditure

Answer 18

Level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP

Question 19

What is the multiplier

Answer 19

The amount by which the change in autonomous expenditure
Is multiplied or magnified
To determine the change in real GDP and equilibrium expenditure

Question 20

Explain how the multiplier works

Answer 20

An increase in investment (or any other component of autonomous expenditure)
Leads to an increase in AE and real GDP
the increase in real GDP leads to an increase in induced expenditure
The increase in induced expenditure Leads to a further increase in AE and real GDP

so real GDP increase by more than the initial increase in autonomous expenditure

Question 21

Why is the multiplier greater than 1

Answer 21

Because an increase in autonomous expenditure induces a further increase in aggregate expenditure

Question 22

When do turning points in the business cycle occur

Answer 22

When autonomous expenditure changes

Question 23

What happens in the businesss cycle when autonomous expenditure increase

Answer 23

It’s brings an unplanned decrease in inventories, which triggers expansion

Question 24

What happens in the business cycle when autonomous expansion decrease

Answer 24

Brings an unplanned increase in inventories, which triggers a recession