20 Questions
What is the relationship described by the consumption function?
The relationship between consumption and disposable income
What is the purpose of the life-cycle model of consumption?
To model people's tendency to save in order to smooth their consumption over their lifetime
What is the mirror image of the consumption function?
The savings function
What does the Permanent Income Hypothesis state?
If the income change is clearly transitory, a significant fraction of the additional income may be saved
What does the wealth effect refer to?
Higher wealth leads to higher consumption
What is the focus of this lecture?
Developing the IS–LM model
According to the Keynesian Cross model, what determines an economy's total income in the short run?
Spending plans of households, businesses, and government
In the IS-LM model, what does a horizontal SRAS curve represent?
A fixed price level in the short run
Who is credited as the father of macroeconomics in relation to the Keynesian Cross model?
John Maynard Keynes
According to the Keynesian Cross model, what happens when there is an increase in spending plans?
Firms can sell more goods and services
What is the primary focus of the IS-LM model?
Determining the equilibrium level of income and interest rate
What does the Keynesian Cross model propose about an economy's total income?
It is determined by the spending plans of households, businesses, and government
What is the significance of a horizontal SRAS curve in the IS-LM model?
It signifies a perfectly elastic supply of goods and services
According to John Maynard Keynes, what drives an increase in total output in the short run?
An increase in aggregate demand
How does the IS-LM model address changes in monetary policy?
By analyzing the effects of changes in money supply on investment and consumption
In the Keynesian Cross model, what does the consumption function specifically describe?
The relationship between consumption and disposable income
What is the purpose of the Permanent Income Hypothesis in the Keynesian Cross model?
To study how people's perception of income changes affects their consumption behavior
What does the mirror image of the consumption function, known as the savings function, specifically describe?
The relationship between savings and disposable income
In the context of the Keynesian Cross model, what does the Life-Cycle Model of Consumption assume about people's savings behavior?
People save primarily to smooth their consumption over their lifetime
What is the implied impact of mandatory social security, as per the Life-Cycle Model of Consumption in the Keynesian Cross model?
It decreases savings by middle-aged workers due to the retirement income supplement
Review and summary of previous lessons on The Keynesian Cross, IS Curve, and LM Curve. Focuses on developing the IS-LM model, which forms the basis of the aggregate demand curve, and examines the short run with a fixed price level.
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