week 21 Flashcards
what is the keynesian model
in the short run firms meet demands at preset prices
firms change prices when marginal benefits exceed marginal costs
how has technology reduced menu costs
barcodes/scanners reduce cost of changing prices in stores
pricing online based on consumer data
costs of competitive analysis, informing consumers etc
what is planned aggregate expenditure (PAE)
total planned spending on final goods and services
consists of: consumption, investment, gov purchases and net exports
how do you calculate PAE
C + I^P + G + NX
what are consumption expenditures
account for 2/3 of spending
includes purchases of goods, services and consumer durables
depends on disposable income
what is the consumption function
an equation relating planned consumption to its determinants
C = C (with line) + (mpc)(Y-T)
what is the wealth effect
tendency of changes in asset prices to affect households wealth and thus their consumption spending
what is (Y-T)
disposable income
output + gov transfers - taxes
main determinant of consumption spending
what are the two dynamic patterns in the economy
declines in production cause reduced spending
reductions in spending lead to declines in production and income
what is autonomous expenditure
part of spending that is independent of output
what is induced expenditure
part of spending that depends on output
what is short-run equilibrium
level of output at which planned spending = output
what were the demand side effects of the covid-19 recession
lockdowns and health fears caused reduced consumption
drop in stock prices reduced wealth and lowered consumption
uncertainty reduced investment
what are the supply side effects of covid-19
businesses could not operate
firms cannot respond to decline in inventory investment
fall in PAE led to fall in output
supply restrictions, affect what is produced
GDP plummeting
what is the income-expenditure multiplier
shows the effect of one unit increase in autonomous expenditure on short-run equilibrium output
the larger the mpc, the greater the multiplier
what are stabilisation policies
gov policies that are used to affect PAE, objective to eliminate output gaps
what are expansion policies
increased PAE
what are contractionary policies
decreased PAE
what is fiscal policy
use changes in gov spending, transfers, taxes
what is monetary policy
changes in money supply
what are the tools of fiscal policy
gov spending - direct effect on PAE
taxation - indirect effect on PAE
transfer payments - indirect effect on PAE
what is discretionary fiscal policy
gov spending - direct effect on PAE
net taxes - indirect effect on PAE
both change gov deficit (G-T)
what is the crowding out effect
tendency of an increase in gov expenditure to increase rate of interest and reduce consumption and investment by the private sector
what determines the strength of the crowding out effect
responsiveness to consumption and investment to interest rate changes
responsiveness of the demand for money to interest rate changes
how do you calculate net taxes
total taxes - transfer payments - gov interest payments
what are the supply side effects of fiscal policy
may affect potential output as well as potential spending
investment infrastructure increases Y*
taxes and transfers affect insentives and can change potential output Y*
what is gov deficit
difference between gov spending and net taxes
managing impact of deficit limits the govs ability to use fiscal policy as a stimulus
what is fiscal policy flexibility
two limits to fiscal policy:
legislative process takes time
competing political objectives
what are automatic stabilisers
automatic changes in gov budget deficit which help dampen fluctuations
increase gov spending or decrease taxes when real output declines
what is discretionary fiscal policy
decisions by gov to increase or decrease the levels of gov purchases, transfer payments and taxation
how do automatic stabilisers effect recessions
incomes, consumption and profits decline
increase in numbers claiming unemployment benefits
net taxes automatically decrease
how do automatic stabilisers affect expansions
incomes, consumption and profits increase
decrease in numbers claiming unemployment benefits
net taxes automatically increase in expansions
what is the keynesian assumption
producers meet demand at preset prices in the short run
Y = PAE
what is the income expenditure multiplier
the effect of a 1-unit increase in autonomous expenditure on short run equilibrium output
1/(1-c)
