Podcast
Questions and Answers
What is the relationship between planned consumption and disposable income in the Keynesian model?
What is the relationship between planned consumption and disposable income in the Keynesian model?
- Planned consumption is a quadratic function of disposable income.
- Planned consumption is inversely proportional to disposable income.
- Planned consumption is a linear function of disposable income. (correct)
- Planned consumption is independent of disposable income.
What does the equation C̄ + c(Y − T̄ ) + Ī + Ḡ = Y represent?
What does the equation C̄ + c(Y − T̄ ) + Ī + Ḡ = Y represent?
- The potential output of an economy.
- The conditions for a government budget surplus.
- The supply side constraints in the economy.
- The relationship between planned and actual expenditure. (correct)
According to Keynesian economics, what can cause the economy to be trapped at a low output level?
According to Keynesian economics, what can cause the economy to be trapped at a low output level?
- High levels of private investment.
- Insufficient government intervention. (correct)
- A balanced budget leading to full employment.
- Self-correcting tendencies in the economy.
How does an increase in autonomous government spending affect equilibrium output (Y)?
How does an increase in autonomous government spending affect equilibrium output (Y)?
Which of the following changes would decrease equilibrium output (Y)?
Which of the following changes would decrease equilibrium output (Y)?
What does the term 'animal spirits' refer to in the context of Keynesian economics?
What does the term 'animal spirits' refer to in the context of Keynesian economics?
In the expression Y = (C̄ − cT̄ + Ī + Ḡ) / (1 − c), what does 'c' represent?
In the expression Y = (C̄ − cT̄ + Ī + Ḡ) / (1 − c), what does 'c' represent?
Which law relates to the phenomenon of high unemployment during economic equilibrium in Keynesian economics?
Which law relates to the phenomenon of high unemployment during economic equilibrium in Keynesian economics?
What does the government spending multiplier indicate about the relationship between government spending and national income?
What does the government spending multiplier indicate about the relationship between government spending and national income?
If the marginal propensity to consume (c) is 0.2, what is the calculated increase in Y when Ḡ increases by $20 billion?
If the marginal propensity to consume (c) is 0.2, what is the calculated increase in Y when Ḡ increases by $20 billion?
What is the formula to determine the total effect of an increase in government spending on output?
What is the formula to determine the total effect of an increase in government spending on output?
What would be the total effect on output if government spending is financed entirely through an increase in taxes?
What would be the total effect on output if government spending is financed entirely through an increase in taxes?
What is the primary reasoning behind the multiplier effect?
What is the primary reasoning behind the multiplier effect?
How does the increase in government spending affect the marginal propensity to consume in the economy?
How does the increase in government spending affect the marginal propensity to consume in the economy?
What is the outcome of increasing both government spending and taxes simultaneously while keeping the budget unchanged?
What is the outcome of increasing both government spending and taxes simultaneously while keeping the budget unchanged?
Which statement best describes the overall impact of the balanced-budget multiplier?
Which statement best describes the overall impact of the balanced-budget multiplier?
What is the key assumption of Keynesian economics regarding price adjustments?
What is the key assumption of Keynesian economics regarding price adjustments?
According to Keynesian theory, what primarily drives business cycles?
According to Keynesian theory, what primarily drives business cycles?
What role does government expenditure play in Keynesian economics?
What role does government expenditure play in Keynesian economics?
Which of the following is NOT a component of planned aggregate expenditure (P AE)?
Which of the following is NOT a component of planned aggregate expenditure (P AE)?
What was a key criticism of Classical business cycle theory?
What was a key criticism of Classical business cycle theory?
What is meant by the term 'sticky prices' in the context of Keynesian economics?
What is meant by the term 'sticky prices' in the context of Keynesian economics?
Which concept describes the unpredictable nature of expectations that can affect the economy?
Which concept describes the unpredictable nature of expectations that can affect the economy?
What is a common mechanism through which Keynesians believe recessions can be alleviated?
What is a common mechanism through which Keynesians believe recessions can be alleviated?
In the Keynesian model, planned consumption is a nonlinear function of disposable income.
In the Keynesian model, planned consumption is a nonlinear function of disposable income.
The Keynesian equilibrium can be reached when planned and actual expenditure are inconsistent.
The Keynesian equilibrium can be reached when planned and actual expenditure are inconsistent.
An increase in autonomous consumption will lead to a decrease in equilibrium output (Y).
An increase in autonomous consumption will lead to a decrease in equilibrium output (Y).
The equation Y = (C̄ − cT̄ + Ī + Ḡ) / (1 − c) can be used to determine how Y depends on various factors.
The equation Y = (C̄ − cT̄ + Ī + Ḡ) / (1 − c) can be used to determine how Y depends on various factors.
Okun’s Law explains the relationship between output levels and unemployment.
Okun’s Law explains the relationship between output levels and unemployment.
Fiscal policy can only affect the economy through changes in autonomous investment.
Fiscal policy can only affect the economy through changes in autonomous investment.
In the Keynesian framework, a decrease in autonomous taxation will increase the equilibrium output (Y).
In the Keynesian framework, a decrease in autonomous taxation will increase the equilibrium output (Y).
High unemployment during economic equilibrium is often viewed as a threat to stability in classical economics.
High unemployment during economic equilibrium is often viewed as a threat to stability in classical economics.
An increase in government spending results in a direct and indirect increase in national income (Y).
An increase in government spending results in a direct and indirect increase in national income (Y).
If the marginal propensity to consume (c) is 0.5, an increase in government spending of $10b would lead to an increase in Y of $20b.
If the marginal propensity to consume (c) is 0.5, an increase in government spending of $10b would lead to an increase in Y of $20b.
The balanced-budget multiplier results in no change in income if government spending is financed fully by tax increases.
The balanced-budget multiplier results in no change in income if government spending is financed fully by tax increases.
In Keynesian economics, 'animal spirits' refer to the confidence and psychological factors that affect consumer spending.
In Keynesian economics, 'animal spirits' refer to the confidence and psychological factors that affect consumer spending.
The government spending multiplier is always greater than one as long as the marginal propensity to consume is between zero and one.
The government spending multiplier is always greater than one as long as the marginal propensity to consume is between zero and one.
In the multiplier effect, the total impact on income is less than the initial change in government spending.
In the multiplier effect, the total impact on income is less than the initial change in government spending.
A decrease in the marginal propensity to consume (c) would lead to a larger multiplier effect.
A decrease in the marginal propensity to consume (c) would lead to a larger multiplier effect.
The derivative of national income Y with respect to government spending Ḡ is equal to $1/(1-c).
The derivative of national income Y with respect to government spending Ḡ is equal to $1/(1-c).
Keynesian economics suggests that supply creates its own demand.
Keynesian economics suggests that supply creates its own demand.
According to the Keynesian model, planned aggregate expenditure includes only consumption and investment.
According to the Keynesian model, planned aggregate expenditure includes only consumption and investment.
In the short run, prices and wages are assumed to be 'sticky' in Keynesian theory.
In the short run, prices and wages are assumed to be 'sticky' in Keynesian theory.
Keynesian economics emphasizes the role of consumer expectations in driving economic fluctuations.
Keynesian economics emphasizes the role of consumer expectations in driving economic fluctuations.
Fiscal policy is typically viewed as counter-productive in Keynesian economics.
Fiscal policy is typically viewed as counter-productive in Keynesian economics.
In a Keynesian framework, a lack of demand can lead to economy-wide market failure.
In a Keynesian framework, a lack of demand can lead to economy-wide market failure.
Classical business cycle theory claims that government intervention is necessary for stabilizing the economy.
Classical business cycle theory claims that government intervention is necessary for stabilizing the economy.
The Keynesian model assumes that planned aggregate expenditure is solely a function of consumer behavior.
The Keynesian model assumes that planned aggregate expenditure is solely a function of consumer behavior.
How can fiscal policy be used to address low levels of output in an economy?
How can fiscal policy be used to address low levels of output in an economy?
What implication does Okun's Law have on unemployment during a Keynesian equilibrium?
What implication does Okun's Law have on unemployment during a Keynesian equilibrium?
In the Keynesian model, how does an increase in autonomous investment (Ī) affect equilibrium output (Y)?
In the Keynesian model, how does an increase in autonomous investment (Ī) affect equilibrium output (Y)?
What role does consumption play in the relationship defined by the equation C = C̄ + c(Y - T)?
What role does consumption play in the relationship defined by the equation C = C̄ + c(Y - T)?
How do changes in government spending (Ḡ) influence the Keynesian equilibrium output (Y)?
How do changes in government spending (Ḡ) influence the Keynesian equilibrium output (Y)?
What does the Keynesian Cross illustrate about planned and actual expenditure?
What does the Keynesian Cross illustrate about planned and actual expenditure?
What does the term 'animal spirits' convey in relation to consumer behavior under Keynesian economics?
What does the term 'animal spirits' convey in relation to consumer behavior under Keynesian economics?
What is a potential consequence of a decrease in autonomous taxes (T̄) in terms of equilibrium output (Y)?
What is a potential consequence of a decrease in autonomous taxes (T̄) in terms of equilibrium output (Y)?
What is the significance of the government spending multiplier in Keynesian economics?
What is the significance of the government spending multiplier in Keynesian economics?
How does an increase in the marginal propensity to consume (c) influence the government spending multiplier?
How does an increase in the marginal propensity to consume (c) influence the government spending multiplier?
What happens to the overall effect on output (Y) when government spending is financed by an equivalent increase in taxes?
What happens to the overall effect on output (Y) when government spending is financed by an equivalent increase in taxes?
Explain the role of consumption in the multiplier effect.
Explain the role of consumption in the multiplier effect.
Define the term 'animal spirits' in the context of Keynesian economics.
Define the term 'animal spirits' in the context of Keynesian economics.
What is the mathematical limit that represents the total effect of an increase in government spending in relation to the marginal propensity to consume (c)?
What is the mathematical limit that represents the total effect of an increase in government spending in relation to the marginal propensity to consume (c)?
How does the balanced-budget multiplier concept address the impact of changes in government spending and taxation?
How does the balanced-budget multiplier concept address the impact of changes in government spending and taxation?
What is the implication of a government expenditure increase for the economy's income in the Keynesian model?
What is the implication of a government expenditure increase for the economy's income in the Keynesian model?
What do Keynesians believe about the relationship between aggregate demand and business cycles?
What do Keynesians believe about the relationship between aggregate demand and business cycles?
How does the concept of 'sticky prices' impact Keynesian economic theory?
How does the concept of 'sticky prices' impact Keynesian economic theory?
What role does government expenditure play in stabilizing the economy according to Keynesian theory?
What role does government expenditure play in stabilizing the economy according to Keynesian theory?
Describe the significance of expectations or 'animal spirits' in Keynesian economics.
Describe the significance of expectations or 'animal spirits' in Keynesian economics.
In Keynesian economics, what is the implication of output being demand-determined?
In Keynesian economics, what is the implication of output being demand-determined?
What does the theoretical equation for planned aggregate expenditure (P AE = C + I + G) illustrate?
What does the theoretical equation for planned aggregate expenditure (P AE = C + I + G) illustrate?
What criticism do Keynesians have toward Classical economics regarding market adjustments?
What criticism do Keynesians have toward Classical economics regarding market adjustments?
What common method do Keynesians propose for alleviating recessions?
What common method do Keynesians propose for alleviating recessions?
In the Keynesian model, planned consumption is a linear function of disposable ______.
In the Keynesian model, planned consumption is a linear function of disposable ______.
Keynesian equilibrium can be achieved when ______ and actual expenditure are consistent.
Keynesian equilibrium can be achieved when ______ and actual expenditure are consistent.
The equation C̄ + c(Y − T̄ ) + Ī + Ḡ = Y is used to find the Keynesian equilibrium level of ______.
The equation C̄ + c(Y − T̄ ) + Ī + Ḡ = Y is used to find the Keynesian equilibrium level of ______.
A decrease in autonomous ______ leads to an increase in equilibrium output (Y).
A decrease in autonomous ______ leads to an increase in equilibrium output (Y).
Okun's Law describes the relationship between output levels and ______.
Okun's Law describes the relationship between output levels and ______.
In the Keynesian model, an increase in government spending (Ḡ) will lead to an ______ in equilibrium output (Y).
In the Keynesian model, an increase in government spending (Ḡ) will lead to an ______ in equilibrium output (Y).
Fiscal policy, such as increasing Ḡ or decreasing T̄, is one way to bring output back to ______.
Fiscal policy, such as increasing Ḡ or decreasing T̄, is one way to bring output back to ______.
According to Keynesian economics, planned aggregate expenditure includes consumption, investment, ______, and government spending.
According to Keynesian economics, planned aggregate expenditure includes consumption, investment, ______, and government spending.
An increase in government spending (Ḡ) increases national income (Y) by more than one-for-one due to the ______ effect.
An increase in government spending (Ḡ) increases national income (Y) by more than one-for-one due to the ______ effect.
In the Keynesian model, a $1 increase in government spending has a direct effect of $1 on ______.
In the Keynesian model, a $1 increase in government spending has a direct effect of $1 on ______.
The balanced-budget multiplier suggests that financing an increase in government spending with an increase in ______ will lead to no change in total output.
The balanced-budget multiplier suggests that financing an increase in government spending with an increase in ______ will lead to no change in total output.
If the marginal propensity to consume (c) is 0.2 and Ḡ increases by $20b, then Y increases by ______.
If the marginal propensity to consume (c) is 0.2 and Ḡ increases by $20b, then Y increases by ______.
In Keynesian economics, the total effect of an increase in Ḡ is greater than the direct effect due to ______.
In Keynesian economics, the total effect of an increase in Ḡ is greater than the direct effect due to ______.
The limit formula for the sum of series in the context of the Keynesian model is expressed as lim ______.
The limit formula for the sum of series in the context of the Keynesian model is expressed as lim ______.
The derivative of national income Y with respect to government spending Ḡ is given by 1/(1-______).
The derivative of national income Y with respect to government spending Ḡ is given by 1/(1-______).
In the Keynesian framework, the multiplier effect amplifies changes in autonomous spending, which affects the ______ in an economy.
In the Keynesian framework, the multiplier effect amplifies changes in autonomous spending, which affects the ______ in an economy.
In Keynesian theory, prices and wages are said to be 'sticky' in the ______ run.
In Keynesian theory, prices and wages are said to be 'sticky' in the ______ run.
According to Keynesian economics, fluctuations in ______ demand drive business cycles.
According to Keynesian economics, fluctuations in ______ demand drive business cycles.
The formula P AE = C + I + G represents planned aggregate ______.
The formula P AE = C + I + G represents planned aggregate ______.
Keynesian economics posits that government ______ can help stabilize the economy during fluctuations.
Keynesian economics posits that government ______ can help stabilize the economy during fluctuations.
Keynesian theory challenges the assertion of Say's Law that supply creates its own ______.
Keynesian theory challenges the assertion of Say's Law that supply creates its own ______.
In a closed economy, P AE is the total planned spending on final domestically produced ______ and services.
In a closed economy, P AE is the total planned spending on final domestically produced ______ and services.
Keynesian theory underscores the importance of ______, which refers to consumer confidence and expectations.
Keynesian theory underscores the importance of ______, which refers to consumer confidence and expectations.
A key assumption in Keynesian economics is that output can be ______-determined.
A key assumption in Keynesian economics is that output can be ______-determined.
Study Notes
Planned Consumption
- A key building block of the Keynesian model
- Planned consumption is a linear function of disposable income
- Written as the equation: C = C̄ + c(Y − T)
- Where:
- C is planned consumption
- C̄ is autonomous consumption (consumption when disposable income is zero)
- c is the marginal propensity to consume (the change in consumption for each dollar change in disposable income)
- Y is disposable income
- T is taxes
- The equation shows that an increase in disposable income will lead to an increase in planned consumption but by a smaller amount.
Equilibrium Output
- In a Keynesian model, the equilibrium level of output is where planned aggregate expenditure (P AE) equals actual expenditure (AE) or output (Y)
- This can be written as the equation: C̄ + c(Y − T̄ ) + I¯ + Ḡ = Y
- This equation can be solved for the equilibrium level of output ( Y )
Keynesian Equilibrium (Keynesian Cross)
- Keynesian equilibrium can be visually represented using the Keynesian Cross
- On the Keynesian Cross, the equilibrium level of output is where the planned aggregate expenditure (P AE) line and the 45-degree line intersect.
Keynesian Equilibrium
- The Keynesian model suggests that economies can become stuck at an equilibrium level of output below potential output.
- This can lead to high unemployment.
- When there is a Keynesian equilibrium, there is no self-correcting tendency for output to change.
Role of Government Expenditure
- Government expenditure can affect the equilibrium level of output.
How Can We Bring Output Back to Potential?
- One approach is to use fiscal policy, like increasing government spending ( Ḡ ) or decreasing taxes ( T̄ ).
- Fiscal policy can be used to shift the planned aggregate expenditure line (P AE ) and move the equilibrium level of output closer to potential output.
How Y depends on Ḡ, T̄, C̄, and I¯
- Increases in government spending ( Ḡ ) increase the equilibrium level of output ( Y )
- Increases in taxes ( T̄ ) reduce the equilibrium level of output ( Y )
- Increases in autonomous consumption ( C̄ ) increase the equilibrium level of output ( Y )
- Increases in autonomous investment ( I¯ ) increase the equilibrium level of output ( Y )
Government Spending Multiplier
- The government spending multiplier shows how a change in government spending affects the equilibrium level of output.
- The multiplier is greater than one, meaning that a change in government spending has an amplified effect on output
- The government spending multiplier is calculated as 1 / (1 - c) where c is the marginal propensity to consume.
- The size of the multiplier depends on the marginal propensity to consume.
Balanced-Budget Multiplier
- If the increase in government spending is financed by an increase in taxes, the balanced-budget multiplier is equal to 1.
- This means that a 1increaseingovernmentspendingfinancedbya1 increase in government spending financed by a 1increaseingovernmentspendingfinancedbya1 increase in taxes will lead to a $1 increase in output.
Planned Consumption
- First building block of the Keynesian model
- Defined as a linear function of disposable income
- Disposable income is given by income minus taxes
- C represents planned consumption
- C̄ represents autonomous consumption (independent of income)
- c represents marginal propensity to consume (change in consumption due to a change in income)
- (Y − T ) represents disposable income
- P AE represents planned aggregate expenditure
Equilibrium Output
- Second building block of the Keynesian model
- Equilibrium output is the level of output at which planned aggregate expenditure equals actual output
- This is where planned spending matches actual spending
- Key condition for equilibrium is that planned aggregate expenditure equals actual output
- To solve for equilibrium output we use the condition: P AE = AE = Y
- Substituting the components, we get a single equation that can be solved for the equilibrium output
Keynesian Equilibrium (Keynesian Cross)
- Visual representation of the Keynesian equilibrium
- Equilibrium is where the planned aggregate expenditure line (P AE) intersects the 45 degree line
- The 45 degree line represents the relationship where planned aggregate expenditure equals actual output
Keynesian Equilibrium
- Key idea is that economies can get stuck at an equilibrium level of output below potential output
- Potential output represents the maximum sustainable level of output
- If the economy is stuck below potential output, it implies high unemployment
- Okun's Law shows the relationship between unemployment and GDP growth
- In this equilibrium, planned and actual expenditure are consistent
- No self-correcting mechanisms are present to push the economy back towards potential output
- This explains persistent high unemployment during the Great Depression
Role of Government Expenditure
- Can be used to increase aggregate demand and push the economy back towards potential output
- Fiscal policies involve changing government spending and taxes
- Increasing government spending or reducing taxes increases aggregate demand
How can we bring output back to potential?
- Fiscal policy can be used, such as increasing government spending or decreasing taxes
- To see how output depends on government spending and taxes we need to solve for equilibrium output
- Solve for output to see its dependence on government spending, taxes, autonomous consumption, and investment
How Y depends on Ḡ, T̄ , C̄, and I¯
- Fiscal policy effects:
- Increase in government spending (Ḡ) increases output (Y)
- Increase in taxes (T̄ ) decreases output (Y)
- Other shifts in demand:
- Increase in autonomous consumption (C̄) increases output (Y)
- Increase in autonomous investment (I¯) increases output (Y)
- Animal spirits represent the level of confidence in the economy. This impacts investment and consumption.
Government Spending Multiplier
- Represents the change in output (Y) resulting from a change in government spending (Ḡ)
- Shows how much output will increase for each dollar increase in government spending
- Multiplier effect is greater than one because government spending leads to further rounds of spending.
- For example, if the marginal propensity to consume (c) is 0.2, a 20billionincreaseingovernmentspendingwillleadtoa20 billion increase in government spending will lead to a 20billionincreaseingovernmentspendingwillleadtoa25 billion increase in output
Increase in Government Spending
- Shows the impact of increased government spending on output
- The equilibrium output shifts to the right, reflecting the higher output level after increased spending
Government Spending Multiplier Intuition
- Direct effect: Government spending directly increases output
- Indirect effect: Part of the increase in output is consumed, leading to further increases in output.
- Total effect: Greater than the direct effect, with the magnitude depending on the propensity to consume.
Balanced-Budget Multiplier
- This represents the change in output (Y) when government spending (Ḡ) and taxes (T̄) increase by the same amount, maintaining a balanced budget.
- In this case, the multiplier effect is approximately one.
- This is because the increase in taxes cancels out the indirect effects of the increase in spending.
Learning Outcomes
- Understand the key contributions and controversies surrounding Keynesian macroeconomic theory.
- Understand the factors that determine aggregate expenditure and the difference between “animal spirits” and the marginal propensity to consume.
Planned Consumption
- Planned consumption is a key building block of the Keynesian model
- It is a linear function of disposable income, meaning it increases based on disposable income.
- The equation for planned consumption is C = C̄ + c (Y − T ), where:
- C̄ is autonomous consumption, meaning consumption that is independent of income
- c is the marginal propensity to consume (MPC), meaning the fraction of each additional dollar of disposable income that is spent
- Y is disposable income
- T is taxes
Equilibrium Output
- Keynesian equilibrium is the level of output that makes planned aggregate expenditure (P AE) equal to actual expenditure, which is also equal to output (Y).
- The equation for Keynesian equilibrium is: C̄ + c(Y − T̄ ) + I¯ + Ḡ = Y
- This equation can be solved for the equilibrium level of Y
- This equilibrium is visualized using the Keynesian Cross
Keynesian Equilibrium
- The economy can be stuck at an equilibrium level of output below potential output
- This can lead to high unemployment according to Okun's Law.
- There is no self-correcting tendency for output to change when the economy is stuck at an equilibrium, which is why Keynes viewed this as an explanation for high unemployment during the Great Depression.
Role of Government Expenditure
- Government expenditure is a component of aggregate expenditure and can be used to influence the equilibrium level of output.
What Can Be Done?
- Fiscal policy can be used to bring output back to potential by increasing government spending or decreasing taxes.
- The equilibrium level of output, Y, depends on government spending (Ḡ ), taxes (T̄ ), autonomous consumption (C̄), and autonomous investment (I¯).
How Y Depends on Ḡ, T̄ , C̄, and I¯
- An increase in autonomous government spending (Ḡ ) increases Y
- An increase in autonomous taxation (T̄ ) decreases Y
- An increase in autonomous consumption (C̄ ) increases Y
- An increase in autonomous investment (I¯ ) increases Y
Government Spending Multiplier
- The government spending multiplier is the ratio of the change in Y to the change in Ḡ.
- The multiplier is greater than 1, meaning an increase in Ḡ leads to an increase in Y that is greater than the change in Ḡ.
- The multiplier effect is amplified both increases and decreases in autonomous expenditure
Balanced-Budget Multiplier
- The balanced-budget multiplier is the ratio of the change in Y to the change in Ḡ when the government finances the increase in Ḡ with an increase in T̄.
- In this case, the balanced-budget multiplier is 1, meaning a 1increaseinGˉfinancedbya1 increase in Ḡ financed by a 1increaseinGˉfinancedbya1 increase in T̄ will lead to a $1 increase in Y.
- The indirect effects are undone by the increase in taxation.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
Test your understanding of the Keynesian model, focusing on planned consumption and equilibrium output. This quiz will cover the key equations and concepts that form the basis of Keynesian economics, including the relationship between disposable income and consumption. Prepare to explore the implications of the Keynesian cross and how aggregate expenditure determines output.
