The Keynesian Model Flashcards
What is the Keynesian Model?
Developed by John Maynard Keynes, this model focuses on how national income and employment are determined by aggregate demand.
Emphasises the importance of demand-side factors in influencing output, especially during periods of unemployment.
What assumptions does the Keynesian Model make?
The model assumes sticky prices, the existence of unutilised resources, and that output is driven by spending, not supply.
Why is demand so important in the Keynesian Model?
The model argues that insufficient spending (demand) is the main reason for unemployment and slow growth.
In contrast to classical theory, Keynesians believe the economy does not always self-correct quickly.
What role does government spending play in the Keynesian Model?
Government spending can play a critical role in filling demand gaps.
What is the role of consumption and saving in the Keynesian Model?
Households do not spend all of their income — they consume part and save the rest.
The more people save rather than spend, the lower the demand for goods/services — this can slow economic activity.
What factors influence consumption?
Consumption depends mainly on disposable income, but is also influenced by expectations and past spending habits.
What is investment in the context of the Keynesian Model?
Investment refers to business spending on capital goods and is treated as autonomous — not directly tied to current income levels.
How does investment impact economic growth?
Investment is vital for stimulating economic growth, but is sensitive to interest rates, business confidence, and government policy.
What does the Keynesian Model say about government and fiscal policy?
The model includes government spending (G), taxes (T), and transfer payments (TR), which influence disposable income and total spending in the economy.
What are the goals of fiscal policy in the Keynesian Model?
Fiscal policy aims to reduce unemployment, stabilise economic fluctuations, and stimulate growth during downturns.
Why did Keynes advocate for government intervention?
In times of low demand, private sector spending may not be enough to sustain full employment, prompting governments to increase spending or lower taxes.
What are key characteristics of a Keynesian economy?
Key characteristics include demand-driven output, no automatic return to full employment, the multiplier effect, and a short-run focus.
How does the Keynesian Model incorporate the government sector?
The model includes taxes, transfer payments, and public spending, which affect disposable income and demand.
What is the significance of the open economy in the Keynesian Model?
It introduces exports and imports, recognising that demand is affected by foreign demand and that part of domestic demand leaks into imports.
Why does the Keynesian Model matter?
It provides a strong argument for counter-cyclical policies and helps explain real-world issues like recessions and the effectiveness of stimulus spending.
