Keynesian Theory & National Income Determination
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Keynesian Theory & National Income Determination

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Questions and Answers

What was published in 1936 that significantly influenced economic theory?

  • The Wealth of Nations
  • Principles of Economics
  • Theories of Surplus Value
  • The General Theory of Employment, Interest & Money (correct)

    • Which of the following sectors is NOT included in the 4 Sector model of the economy?

  • Non-profit organizations (correct)
  • Foreign sector
  • Households
  • Firms

    • What essential economic relationship does Keynes explore in his theory?

  • The relationship between interest rates and foreign investment
  • The relationship between inflation and unemployment
  • The relationship between savings and investments
  • The relationship between consumption and income (correct)

    • What are the key sectors in a closed economy, according to Keynesian theory?

    <p>Households and Firms</p> Signup and view all the answers

    Which of the following years is associated with the onset of the Great Depression?

    <p>1929</p> Signup and view all the answers

    What is the formula for Aggregate Demand (AD)?

    <p>AD = C + I</p> Signup and view all the answers

    What does the variable 'b' represent in the consumption function formula C = a + bY?

    <p>Marginal Propensity to Consume (MPC)</p> Signup and view all the answers

    What happens to total consumption (C) as income (Y) increases, according to the consumption function?

    <p>Total consumption increases</p> Signup and view all the answers

    In the consumption function, what does 'a' signify?

    <p>Autonomous consumption</p> Signup and view all the answers

    What is the Average Propensity to Consume (APC) when the income is $300?

    <p>1.00</p> Signup and view all the answers

    What does the term 'Marginal Propensity to Consume' (MPC) refer to?

    <p>The change in consumption resulting from a change in income</p> Signup and view all the answers

    Which of the following represents the autonomous consumption value?

    <p>$60</p> Signup and view all the answers

    How does consumption change as income increases from $400 to $500?

    <p>Increases by $20</p> Signup and view all the answers

    What is the APC when the total income is $200?

    <p>1.15</p> Signup and view all the answers

    What does the real flow represent in the circular flow diagram?

    <p>Physical movement of goods and services</p> Signup and view all the answers

    At what point does the APC become less than 1?

    <p>$400</p> Signup and view all the answers

    What do the firms pay households for in the circular flow model?

    <p>Factors of production</p> Signup and view all the answers

    Which component of the circular flow diagram represents what households spend on goods and services?

    <p>Consumption Expenditure</p> Signup and view all the answers

    What does the formula ext{Factor Payment} = ext{Value of Output} signify in the circular flow model?

    <p>Payments being equivalent to the overall value produced</p> Signup and view all the answers

    In the circular flow diagram, which colors represent the household and firm sectors respectively?

    <p>Yellow for households and light green for firms</p> Signup and view all the answers

    What is the formula to calculate Saving (S)?

    <p>S = Y - C</p> Signup and view all the answers

    At an income level of $400, what is the consumption value?

    <p>380</p> Signup and view all the answers

    What is the Average Propensity to Save (APS) when income (Y) is $500 and savings (S) is $40?

    <p>0.10</p> Signup and view all the answers

    What would the savings (S) be if income (Y) is $300 and consumption (C) is $320?

    <p>-20</p> Signup and view all the answers

    Which value indicates a positive saving from the table?

    <p>20</p> Signup and view all the answers

    What does the intersection point in a break-even analysis represent?

    <p>Total revenue equals total costs</p> Signup and view all the answers

    Which area of the triangle in the break-even diagram signifies a loss?

    <p>Dissaving</p> Signup and view all the answers

    What is represented on the horizontal axis of a break-even analysis diagram?

    <p>Quantity produced</p> Signup and view all the answers

    What does the line graph representing total cost indicate in the diagram?

    <p>The relationship between quantity and total costs</p> Signup and view all the answers

    What is the primary purpose of a break-even analysis?

    <p>To determine the level of production to avoid losses</p> Signup and view all the answers

    What are the two components of Aggregate Supply (AS)?

    <p>Consumption (C) and Savings (S)</p> Signup and view all the answers

    Which equation represents the relationship between Aggregate Supply (AS) and Income (Y)?

    <p>Y = C + S</p> Signup and view all the answers

    What does the intersection point (E) on the graph represent?

    <p>The equilibrium level of income and output</p> Signup and view all the answers

    At equilibrium, what is the relationship between Investment (I) and Savings (S)?

    <p>I equals S</p> Signup and view all the answers

    Which statement correctly describes Aggregate Demand (AD)?

    <p>AD is equal to AS at equilibrium</p> Signup and view all the answers

    What characterizes deficient demand in an economy?

    <p>Aggregate demand is lower than potential output</p> Signup and view all the answers

    What does the deflationary gap represent?

    <p>The difference between actual output and full employment output</p> Signup and view all the answers

    Which statement is true regarding the position of aggregate demand in a deflationary gap?

    <p>It is to the left of the aggregate supply curve.</p> Signup and view all the answers

    What occurs when the economy is at full employment output (Yf)?

    <p>All available resources are fully utilized.</p> Signup and view all the answers

    What can be a consequence of a deflationary gap?

    <p>Higher levels of unemployment</p> Signup and view all the answers

    What happens when aggregate demand shifts to the right, resulting in excess demand?

    <p>Price levels increase while output increases.</p> Signup and view all the answers

    Which statement accurately describes the aggregate supply curve?

    <p>It slopes upward, showing more supply at higher prices.</p> Signup and view all the answers

    What represents the equilibrium point in the context of aggregate demand and supply?

    <p>The intersection point of the AD and AS curves.</p> Signup and view all the answers

    In an inflationary gap, what primarily drives the rise in price levels?

    <p>Excess in demand exceeding available supply.</p> Signup and view all the answers

    What is indicated by a shift of the aggregate demand curve to the right?

    <p>An increase in the overall demand for goods and services.</p> Signup and view all the answers

    Study Notes

    Keynesian Theory & National Income Determination

    • Keynesian Economics: Emerged during the Great Depression (1930) as a response to classical economic theories that failed to explain the severity of the economic downturn.
    • John Maynard Keynes: Author of "The General Theory of Employment, Interest & Money" (1936), which presented a new framework for understanding economic fluctuations and government intervention.
    • Key Concepts:
      • Consumption Function: Relationship between income and consumption spending, represented by C = a + bY (where 'a' is autonomous consumption, 'b' is the marginal propensity to consume (MPC), and Y is income).
      • MPC: The change in consumption spending resulting from a one-unit change in income (ΔC/ΔY).
      • Saving Function: Relationship between income and saving, represented by S = Y - C (where S is savings, Y is income, and C is consumption).
      • MPS (Marginal Propensity to Save): Change in saving resulting from a one-unit change in income (ΔS/ΔY).
      • APC (Average Propensity to Consume): Consumption spending as a proportion of income (C/Y).
      • APS (Average Propensity to Save): Savings as a proportion of income (S/Y).
    • National Income Equilibrium: Occurs when aggregate demand (AD) equals aggregate supply (AS). In a two-sector economy, this is represented by the equation AD = C + I = AS = Y, where I is investment spending.
    • Deficient Demand (Deflationary Gap): Occurs when AD is less than AS, leading to unemployment and potential deflation.
    • Excess Demand (Inflationary Gap): Occurs when AD exceeds AS, leading to inflationary pressures and potential shortages.
    • Circular Flow Model: Illustrates economic activity as a continuous cycle of spending and production. Includes households, firms, and the flow of goods, services, and money between them.
    • Aggregate Demand (AD): Total planned spending in an economy, composed of consumer spending (C) and investment spending (I).
    • Keynesian Multiplier: An increase in spending leads to a larger increase in national income, due to the circular flow of spending. This is represented by the formula Multiplier = 1/(1-MPC).

    Sub-Components of National Income

    • Households: Primarily involved in consuming goods and services, supplying factors of production (labor, land, capital), and receiving factor payments (wages, rent, interest, profits).
    • Firms: Employ factors of production to produce goods and services.
    • Government: Plays a role in regulating the economy and providing public goods and services.
    • Rest of the World (Foreign Sector): Represents international trade and its impact on the economy.

    National Income Determination (2-Sector Model)

    • Aggregate Supply (AS): Represented by national income (Y), which is the sum of consumption (C) and savings (S).
    • Equilibrium: Equilibrium income occurs where AD equals AS.

    Break-Even Analysis

    • Break-Even Point: The point where a firm's total revenue equals its total cost, resulting in zero profit or loss.
    • Dissaving: A situation where consumption exceeds income.
    • Savings: Occurs when income exceeds consumption.

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    Description

    Explore the fundamentals of Keynesian economics, focusing on key concepts such as the consumption function, marginal propensity to consume, and how these relate to national income. Learn about John Maynard Keynes' influence on economic theory during the Great Depression and the significance of government intervention in the economy.

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