Week 21 - Spending and Output Flashcards
What is a recessionary gap?
A recessionary gap occurs when available resources are underutilised, leading to higher unemployment and insufficient spending to support normal levels of production.
How did the Great Depression exemplify a recessionary gap?
During the Great Depression, unemployed resources (workers, factories) and a decline in public spending led to lower production and a vicious cycle of decreased spending and rising unemployment.
How did a decrease in spending affect the economy during the Great Depression?
As spending decreased, businesses reduced production and laid off workers, causing further reductions in income and spending, leading to a self-reinforcing cycle of economic decline.
Why was conventional economic policy ineffective during the Great Depression?
Conventional policies of the 1920s and 1930s failed because they did not address the fundamental issue of insufficient demand; they didn’t stimulate spending or employment to break the downward cycle.
How did John Maynard Keynes change economic thinking during the Great Depression?
John Maynard Keynes argued that government intervention through public spending and investment could increase demand and create jobs, breaking the recessionary gap and helping the economy recover.
How did John Maynard Keynes view the aftermath of World War I?
Keynes believed that the terms of the peace (especially German war reparations) would prevent economic growth and recovery, possibly leading to another war.
What is The General Theory of Employment, Interest, and Money (1936)?
It is Keynes’s best-known work, where he explored why economies could remain in a recessionary gap for long periods due to insufficient aggregate spending.
According to Keynes, why do economies experience recessionary gaps?
Keynes argued that aggregate spending in the economy is too low for full employment, preventing recovery and leading to prolonged economic stagnation.
What are stabilisation policies in Keynesian economics?
Stabilisation policies involve government intervention through spending or tax adjustments to substitute for lack of spending in other sectors, stimulating demand and promoting full employment.
What is the Keynesian model?
The Keynesian model is a foundational theory for understanding short-run economic fluctuations and stabilisation policies, focusing on how aggregate demand affects output and employment in the short run.
How do firms meet demand in the short run according to the Keynesian model?
In the short run, firms meet demand at preset prices, meaning that they typically do not adjust prices immediately in response to changes in demand.
What are menu costs in the context of the Keynesian model?
Menu costs are the costs associated with changing prices, including:
Determining the new price.
Incorporating the new price into business operations.
Informing consumers about the new price.
When do firms decide to change prices according to the Keynesian model?
Firms will change prices when the marginal benefits (e.g., increased revenue) of changing prices exceed the marginal costs (e.g., the costs of changing the prices and informing customers).
How has technology reduced menu costs in recent years?
Technology has helped reduce menu costs by:
Using barcodes and scanners to make price changes easier in stores.
Employing online surveys for real-time feedback.
What are examples of highly segmented pricing made possible by technology?
Examples of highly segmented pricing include:
Airlines using dynamic pricing to adjust fares based on demand and customer characteristics.
Online platforms like eBay and Priceline setting prices dynamically based on bidding and consumer preferences.
How have ride-sharing apps affected the way prices are set?
Ride-sharing apps like Uber and Lyft use algorithms to adjust prices in real-time based on demand, supply, and traffic conditions, offering highly flexible pricing.
What other costs remain when changing prices despite advances in technology?
Despite technological advances, businesses still face costs such as:
Competitive analysis to understand market conditions.
Deciding the new prices that maximise profit.
Informing consumers about price changes, which can require marketing efforts.
What is Planned Aggregate Expenditure (PAE)?
Planned Aggregate Expenditure (PAE) is the total planned spending on final goods and services in an economy.
What are the four components of Planned Aggregate Expenditure (PAE)?
The four components of PAE are:
Consumption (C) – Planned spending by households on goods and services.
Investment (I) – Planned spending by domestic firms on new capital goods.
Government Purchases (G) – Spending by federal, state, and local governments.
Net Exports (NX) – The difference between exports and imports (exports - imports).
What is the role of consumption (C) in Planned Aggregate Expenditure (PAE)?
Consumption (C) is the spending by households on goods and services, and it is a major determinant of aggregate demand in the economy.
How is investment (I) defined in the context of PAE?
Investment (I) refers to the planned spending by domestic firms on new capital goods such as machinery, buildings, and equipment.
What is included in government purchases (G) for PAE?
Government purchases (G) include spending by federal, state, and local governments on goods and services, such as infrastructure and defence.
How is net exports (NX) calculated in PAE?
Net exports (NX) are calculated as the difference between exports (goods and services sold to other countries) and imports (goods and services purchased from other countries):
NX = Exports - Imports.
How is unplanned inventory investment related to sales?
Unplanned inventory investment occurs when actual sales are different from expected sales, leading to either a surplus or shortage in inventory, which affects total investment.
