AP Econ Keynesian Economics
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- Which economist argued that the economy was not self-correcting and therefore could indeed remain below full employment indefinitely because of inadequate aggregate spending.
- John Maynard Keynes
- Which group of economists believed that a continuing depression is impossible because markets will eliminate persistent shortages or surpluses
- Classical Economists
- What is the belief of the Classical economists that the economy was always tending toward full employment?
- Say's Law
- What does Say’s Law say?
- Supply creates its own demand
- Under Say’s Law, is unemployment possible?
- Yes, but it is a short-lived adjustment period in which wages and prices decline or people voluntarily choose not to work
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Why did Keynes’ believe that Say's law would not work?
Say's Law: “supply did not create its own demand� - Aggregate expenditures (demand) can be forever inadequate for an economy to achieve full employment
- What determines your family’s spending for goods and services?
- Disposable income
- In the Keynesian Theory, what is the consumption function?
- The graph that shows the amount households spend for goods and services at different levels of disposable income
- What is savings?
- Disposable income minus consumption, the amount households do not spend for consumer goods and services
- What is dissaving?
- The amount by which personal consumption expenditures exceed disposable income
- How do people dissave?
- Negative savings is financed by by drawing down previously accumulated financial assets or by borrowing
- What is "autonomous" consumption?
- Consumption that is independent of the level of disposable income
- What is the change in consumption resulting from a given change in real disposable income
- marginal propensity to consume (MPC)
- What is the change in saving resulting from a given change in real disposable income
- marginal propensity to save (MPS)
- MPC =
-
MPC =
CHANGE IN CONSUMPTION
divided by
CHANGE IN DISPOSABLE INCOME - MPS =
-
MPS =
CHANGE IN SAVINGS
divided by
CHANGE IN DISPOSABLE INCOME - What 5 variables would cause a shift in the Keynesian consumption function curve?
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Expectations
Wealth
Price level
Interest rate
Stock of durable goods - In Keynesian economics, how does the price level affect the consumption function?
- Any change in the general price level shifts the consumption schedule by reducing or enlarging the consumers purchasing power (THIS IS DIFFERENT FROM THE AS/AD THEORY IN WHICH A CHANGE IN PRICE DOES NOT CAUSE A SHIFT IN THE CURVE)
- In Keynesian economics, how does the interest rate affect the consumption function?
- A high interest rate will discourage people from borrowing money and a low interest rate will encourage people to borrow money
- According to the Classical Economists, what determined the level of investment?
- The interest rate
- According to Keynes, what determines the level of investment?
- Expectations of future profits is the primary factor, the interest rate is the financing cost of any investment proposal
- In Keynesian economics, what is the investment demand curve?
- The curve that shows the amount businesses spend for investment goods at different possible rates of interest
- In Keynesian economics, what happens to the investment function cure when capacity utilization is low?
- When capacity utilization is low, firms can meet an increase in demand without expanding.
- In Keynesian economics, what happens to the investment function cure when capacity utilization is high?
- When capacity utilization is high, firms must increase investment to meet an increase in demand
- In Keynesian economics, what is the aggregate expenditure function?
- The function that represents total spending in an economy at a given level of real disposable income
- In Keynesian economics, what are the 5 variables causing the investment demand to be unstable?
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Expectations
Technological change
Capacity utilization
Business taxes
Autonomous reasons