Topic 3 Flashcards
what is the purpose of the Keynesian model?
explain how (fluctuations in) national income/output (arise) is determined
what are the conclusions and policy implications of the Keynesian Model?
-unemployment caused by deficiencies in demand
-a stronger role for short-term government intervention
what are the assumptions of the Keynesian Model?
-goods and services market only
-prices are fixed
-unemployed resources ion economy
-firms supply whatever amount is demanded
-closed economy
what are the findings of the Keynesian Model?
-output is demand-determined
-feedback between spending and output
-spending»_space;> output
-there is a multiplier effect
-a role for government
-fiscal policy
-countercyclical policy
what is the Marginal propensity to consume?
the fraction of each additional unit of income that is spent on goods and services
what does aggregate expenditure comprise of?
-planned consumer spending by households
-planned investment spending by firms
what is the function for aggregate expenditure?
AE= C + I (bar)
what is the consumption function?
C = C (bar) + bY
what is the savings function?
S = (1 – b)Y
proof for the savings function:
Y = C + S
S = Y – C where C = bY
S = Y - bY
S = (1 – b)Y
what does the aggregate expenditure function show?
the total planned expenditure by households and firms at each income level
for keynes, the equilibrium level of income/output is determined by what?
the planned level of expenditure (AE) in the economy
if AE= Y , what happens?
no unplanned inventory changes
when AE> Y, what happens?
firms will experience an unplanned fall in inventories
when AE< Y, what happens?
firms will experience an unplanned rise in inventories
when AE= Y, what happens?
no unplanned changes in stocks
what does the Keynesian Multiplier tell us?
how much output changes after a change in autonomous expenditure
why is the keynesian multiplier greater than one?
because a change in
autonomous expenditure (eg I bar or G bar ) sets off further changes in consumption expenditure (C = bY)
what does the size of the multiplier depend on?
the MPC
