Keynesian Model

Overview

The Keynesian model is a macroeconomic model that explains the economy's behavior in terms of aggregate demand and supply. It was developed by John Maynard Keynes in the 1930s and is based on the idea that government intervention is necessary to stabilize the economy during times of economic downturn.

Key Assumptions

• The model assumes that prices are sticky, meaning they do not adjust quickly to changes in the economy.
• It assumes that wages are also sticky, and do not adjust quickly to changes in the economy.
• The model assumes that there is a lack of perfect competition in the economy, leading to market failures.
• It assumes that people are rational, but they do not have perfect information.

Components of Aggregate Demand

• Consumption (C): the amount of goods and services consumed by households
• Investment (I): the amount of goods and services purchased by businesses for future production
• Government Spending (G): the amount of goods and services purchased by the government
• Net Exports (NX): the value of exports minus the value of imports

Aggregate Demand Curve

• The aggregate demand curve shows the inverse relationship between the overall price level and the quantity of goods and services demanded.
• The curve is downward sloping, indicating that as the price level increases, the quantity of goods and services demanded decreases.

Aggregate Supply Curve

• The aggregate supply curve shows the relationship between the overall price level and the quantity of goods and services supplied.
• The curve is upward sloping, indicating that as the price level increases, the quantity of goods and services supplied also increases.

Equilibrium

• The point at which the aggregate demand curve intersects the aggregate supply curve is the equilibrium point.
• At this point, the quantity of goods and services demanded equals the quantity of goods and services supplied.

Fiscal Policy

• Fiscal policy is the use of government spending and taxation to stabilize the economy.
• Expansionary fiscal policy involves increasing government spending or decreasing taxes to stimulate the economy.
• Contractionary fiscal policy involves decreasing government spending or increasing taxes to reduce inflation.

Criticisms and Limitations

• The model assumes that the economy is always in a state of disequilibrium, which is not always the case.
• The model does not account for the role of expectations in the economy.
• The model assumes that the government can accurately diagnose and respond to economic problems, which is not always the case.

Keynesian Model

• A macroeconomic model explaining the economy's behavior in terms of aggregate demand and supply, developed by John Maynard Keynes in the 1930s.
• Based on the idea that government intervention is necessary to stabilize the economy during times of economic downturn.

Key Assumptions

• Prices are sticky and do not adjust quickly to changes in the economy.
• Wages are also sticky and do not adjust quickly to changes in the economy.
• Lack of perfect competition in the economy leads to market failures.
• People are rational, but they do not have perfect information.

Components of Aggregate Demand

• Consumption (C): amount of goods and services consumed by households.
• Investment (I): amount of goods and services purchased by businesses for future production.
• Government Spending (G): amount of goods and services purchased by the government.
• Net Exports (NX): value of exports minus the value of imports.

Aggregate Demand Curve

• Shows the inverse relationship between the overall price level and the quantity of goods and services demanded.
• Downward sloping, indicating that as the price level increases, the quantity of goods and services demanded decreases.

Aggregate Supply Curve

• Shows the relationship between the overall price level and the quantity of goods and services supplied.
• Upward sloping, indicating that as the price level increases, the quantity of goods and services supplied also increases.

Equilibrium

• Point at which the aggregate demand curve intersects the aggregate supply curve.
• Quantity of goods and services demanded equals the quantity of goods and services supplied.

Fiscal Policy

• Use of government spending and taxation to stabilize the economy.
• Expansionary fiscal policy: increasing government spending or decreasing taxes to stimulate the economy.
• Contractionary fiscal policy: decreasing government spending or increasing taxes to reduce inflation.

Criticisms and Limitations

• Assumes the economy is always in a state of disequilibrium, which is not always the case.
• Does not account for the role of expectations in the economy.
• Assumes the government can accurately diagnose and respond to economic problems, which is not always the case.