Lecture 7: Keynesian Income and Expenditure Model

The total amount of spending on goods and services in an economy at a specific income level.

The total quantity of goods and services demanded in an economy across all price levels at a given time.

The total quantity of goods and services that firms are willing to produce and sell at a given price level.

It's the condition where the total amount of spending on goods and services (aggregate expenditure) equals the total amount of goods and services produced (aggregate supply).

The relationship between the level of income in an economy and the total amount of spending (aggregate expenditure).

A situation where the economy is operating below its full potential, with unused resources and high unemployment levels.

Government actions aimed at influencing the economy, primarily through changes in spending and taxes.

A model that explains the relationship between spending and income in an economy, focusing on the short-run effects of changes in spending on the economy.

The change in consumption divided by the change in income. It measures the proportion of an additional dollar of income that is spent on consumption.

The portion of each additional dollar of income that is saved. It's the complement of the MPC, meaning MPC + MPS = 1.

The relationship between aggregate consumption and disposable income. It shows how much people consume at different levels of income.

The consumption level that occurs even when income is zero. It represents the fixed level of consumption necessary for basic needs.

The relationship between aggregate savings and disposable income. It shows how much people save at different levels of income.

The savings level that occurs even when income is zero. It's often negative, implying borrowing to finance basic necessities.

In a closed economy, all income must be either consumed or saved. This principle is used to derive the relationship between savings and consumption.

The total spending in an economy, including consumption, investment, government spending, and net exports.

The point where the aggregate expenditure (AE) line intersects the 45-degree line, representing the level of real GDP where total spending equals total output.

A straight line with a slope of 1, representing all possible combinations of real GDP and aggregate expenditure where total spending equals total output.

The relationship between planned spending and total output.

The component of autonomous spending that represents spending on physical capital, like buildings and equipment.

The component of autonomous spending that represents spending on consumer goods and services.

The process of finding the equilibrium level of real GDP in the Keynesian model by setting aggregate expenditure equal to real GDP.

The change in the aggregate expenditure curve caused by a change in spending, like investment or government spending.

The amount of spending that changes based on changes in income. This is represented by the slope of the consumption function.

MPS (Marginal Propensity to Save) represents the proportion of an additional dollar of income that is saved. It's calculated as the change in saving divided by the change in income.

MPC (Marginal Propensity to Consume) reflects the portion of an additional dollar of income that is spent on consumption. It's calculated as the change in consumption divided by the change in income.

Keynesian Equilibrium occurs when aggregate expenditure (AE) equals national income (Y). This means the total amount spent in the economy is equal to the total value of goods and services produced.

The 45-degree line represents all points where aggregate expenditure (AE) equals national income (Y). This line serves as a visual aid to depict equilibrium.

Autonomous spending refers to components of aggregate expenditure that do not depend on income levels, like investment (I), government spending (G), and net exports (X-M).

The sum of autonomous spending and induced spending (determined by income) equals the total aggregate expenditure (AE). It's represented as AE = A + bY, where A is autonomous spending and b is the MPC.

The slope of the aggregate expenditure (AE) curve is equal to MPC, reflecting how much spending changes for every dollar change in income. It shows the relationship between AE and income (Y)

The aggregate expenditure (AE) curve intersects the 45-degree line at the equilibrium point. This intersection represents the level of income where planned spending equals production.

The multiplier effect describes how a change in an autonomous component of aggregate expenditure (like government spending or investment) leads to a larger change in real GDP.

The multiplier is the ratio of the change in equilibrium real GDP to the change in autonomous expenditure. It tells us how much real GDP changes for each unit change in autonomous spending.

An autonomous component of aggregate expenditure is a component that doesn't depend on the level of income. Examples include government spending, investment, and exports.

The multiplier is calculated as 1/(1-MPC). A higher MPC means a larger multiplier, since more of each additional dollar of income is spent, leading to more spending and a larger change in GDP.

The multiplier effect plays a key role in macroeconomics because it helps explain how changes in government spending, investment, or other autonomous components can have a significant impact on the economy.