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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?
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?
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?
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?
In the Keynesian macroeconomic model, what is the multiplier a function of?
In the case of insufficient aggregate demand, household savings is greater than what?
In the case of insufficient aggregate demand, household savings is greater than what?
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?
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?
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?
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?
What best describes the relationship between interest rates and savings in the Keynesian macroeconomic model?
What best describes the relationship between interest rates and savings in the Keynesian macroeconomic model?
Which variable determines the slope of the aggregate demand (AD) curve in the Keynesian model?
Which variable determines the slope of the aggregate demand (AD) curve in the Keynesian model?
Which variable is classified as an injection in the output-income-spending flow model?
Which variable is classified as an injection in the output-income-spending flow model?
According to Keynesian economists, the key variable that determines household saving rates is the interest rate.
According to Keynesian economists, the key variable that determines household saving rates is the interest rate.
According to the classical macroeconomic model, whenever injections are not equal to leakages, the wage rate will adjust to keep the macroeconomy in equilibrium.
According to the classical macroeconomic model, whenever injections are not equal to leakages, the wage rate will adjust to keep the macroeconomy in equilibrium.
According to the Keynesian macroeconomic model, massive unemployment is possible when an economy is in a state of equilibrium.
According to the Keynesian macroeconomic model, massive unemployment is possible when an economy is in a state of equilibrium.
According to the Keynesian macroeconomic model, the level of intended business investment depends upon the inflation rate.
According to the Keynesian macroeconomic model, the level of intended business investment depends upon the inflation rate.
According to the Keynesian model, injections will be kept equal to leakages through adjustment in the market for loanable funds.
According to the Keynesian model, injections will be kept equal to leakages through adjustment in the market for loanable funds.
During the Great Depression, the unemployment rate in the United States at times exceeded 20%.
During the Great Depression, the unemployment rate in the United States at times exceeded 20%.
In the Keynesian macroeconomic model, aggregate demand is equal to the sum of consumption and income.
In the Keynesian macroeconomic model, aggregate demand is equal to the sum of consumption and income.
It is generally expected that an economic downturn will lead to an increase in inflation.
It is generally expected that an economic downturn will lead to an increase in inflation.
If intended business investment declines by $100, the Keynesian multiplier effect implies that total income will decrease by more than $100.
If intended business investment declines by $100, the Keynesian multiplier effect implies that total income will decrease by more than $100.
Aggregate demand (in an economy with no government or foreign sector) is defined as consumption plus intended investment.
Aggregate demand (in an economy with no government or foreign sector) is defined as consumption plus intended investment.
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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.
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