Questions and Answers
According to the classical macroeconomic model, what variable adjusts to keep the economy in equilibrium when leakages are not equal to injections?
the interest rate
According to the Keynesian macroeconomic model, consumption is a function of which three variables?
Autonomous consumption, the marginal propensity to consume, and income
According to the Keynesian macroeconomic model, what does the level of intended investment depend upon?
the level of optimism or pessimism among investors
In the Keynesian macroeconomic model, what is the multiplier a function of?
Signup and view all the answers
In the case of insufficient aggregate demand, household savings is greater than what?
Signup and view all the answers
What is Jane's marginal propensity to save if her income increases from $30,000 to $35,000 and her consumption changes from $26,000 to $29,000?
Signup and view all the answers
If the demand for loanable funds increases, what happens to the quantity of funds loaned and the interest rate according to the classical macroeconomic model?
Signup and view all the answers
What best describes the relationship between interest rates and savings in the Keynesian macroeconomic model?
Signup and view all the answers
Which variable determines the slope of the aggregate demand (AD) curve in the Keynesian model?
Signup and view all the answers
Which variable is classified as an injection in the output-income-spending flow model?
Signup and view all the answers
According to Keynesian economists, the key variable that determines household saving rates is the interest rate.
Signup and view all the answers
According to the classical macroeconomic model, whenever injections are not equal to leakages, the wage rate will adjust to keep the macroeconomy in equilibrium.
Signup and view all the answers
According to the Keynesian macroeconomic model, massive unemployment is possible when an economy is in a state of equilibrium.
Signup and view all the answers
According to the Keynesian macroeconomic model, the level of intended business investment depends upon the inflation rate.
Signup and view all the answers
According to the Keynesian model, injections will be kept equal to leakages through adjustment in the market for loanable funds.
Signup and view all the answers
During the Great Depression, the unemployment rate in the United States at times exceeded 20%.
Signup and view all the answers
In the Keynesian macroeconomic model, aggregate demand is equal to the sum of consumption and income.
Signup and view all the answers
It is generally expected that an economic downturn will lead to an increase in inflation.
Signup and view all the answers
If intended business investment declines by $100, the Keynesian multiplier effect implies that total income will decrease by more than $100.
Signup and view all the answers
Aggregate demand (in an economy with no government or foreign sector) is defined as consumption plus intended investment.
Signup and view all the answers
Study Notes
Classical Macroeconomic Model
- The interest rate adjusts to maintain economic equilibrium when leakages differ from injections.
- An increase in loanable funds demand leads to a higher quantity of funds loaned and elevated interest rates.
Keynesian Macroeconomic Model
- Consumption is influenced by three factors: autonomous consumption, marginal propensity to consume (MPC), and income.
- Intended investment levels reflect investors' optimism or pessimism about the economy.
- The marginal propensity to consume is crucial in calculating the multiplier effect.
- Aggregate demand (in no government or foreign trade contexts) comprises consumption plus intended investment.
Savings and Investment
- In scenarios of insufficient aggregate demand, household savings outstrip intended investment.
- If intended business investment decreases, the Keynesian multiplier effect suggests total income will drop by a greater amount.
Marginal Propensity to Save
- If Jane's income rises from $30,000 to $35,000 and her consumption increases from $26,000 to $29,000, her marginal propensity to save is 0.4.
Interest Rates and Savings
- The relationship between interest rates and savings within the Keynesian model is ambiguous; higher interest rates could result in either increased or decreased savings.
Misconceptions in Keynesian Economics
- Counter to some beliefs, interest rates do not primarily determine household saving rates.
- Wage rate adjustments do not ensure macroeconomic equilibrium in response to unequal injections and leakages.
- The presence of massive unemployment does not exclude the possibility of economic equilibrium in the Keynesian framework.
- Inflation rate is not seen as a key determinant of business investment levels.
Historical Context
- During the Great Depression, US unemployment rates soared above 20%, highlighting severe economic distress.
Key Truths and Falsehoods
- Aggregate demand is more complex than merely summing consumption and income, as indicated by false statements regarding this relationship.
- It is incorrect to assume economic downturns typically lead to increased inflation; rather, the opposite holds true in most cases.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Test your knowledge on Classical and Keynesian Macroeconomic Models. This quiz covers key concepts like interest rates, consumption factors, investment levels, and the marginal propensity to consume. Challenge yourself and see how well you understand the dynamics of savings and investment in the economy.
