Macroeconomics: Keynesian Model Flashcards

Questions and Answers

What is autonomous consumption spending?

It is the part of consumption spending that is independent of income, depicted as a vertical line on the graph showing consumption at zero disposable income.

What is autonomous consumption spending dependent on?

It is dependent on assets (like houses), expectations of future income, difficulty of borrowing money, and minimum standards of living.

What caused the recessions in 1953, 1974, 1981, and 2001?

The government tried to tighten monetary policies to control inflation but gave up before achieving effective results.

What caused the expansions of the early 1950s, late 1960s, 1980s, and 1990s?

Increased defense spending due to foreign government conflict and recovery from the oil crisis, along with the internet boom. Signup and view all the answers

What is the consumption function?

It is a positively sloped relationship between real consumption and real disposable income. Signup and view all the answers

How do changes in net taxes and autonomous consumption affect the consumption function?

When net taxes decrease and autonomous consumption increases, the consumption function increases. When net taxes increase and autonomous consumption decreases, the consumption function decreases. Signup and view all the answers

What is the Marginal Propensity to Consume (MPC)?

MPC is the slope of the consumption function; it represents the amount consumption rises when disposable income rises by $1.00. Signup and view all the answers

What is Aggregate Expenditure (AE)?

AE is the sum of spending by households, businesses, government, and foreigners on final goods and services produced in the U.S. Signup and view all the answers

How do you find Short-Run (SR) equilibrium GDP?

By finding the level of output at which output and aggregate expenditure are equal. Signup and view all the answers

What causes cyclical unemployment in the Keynesian model?

Cyclical unemployment is caused by total spending being too low, leading to less production and less employment. Signup and view all the answers

What is the expenditure multiplier?

It is the amount by which equilibrium real GDP changes as a result of a one dollar change in autonomous consumption, investment spending, government purchases, or net exports. Signup and view all the answers

How does the expenditure multiplier work in reverse?

Decreases in investment spending cause equilibrium GDP to fall by a multiplier of the change in spending. Signup and view all the answers

How do automatic stabilizers reduce the multiplier?

They shrink the additional spending that occurs in each round of the multiplier, thereby reducing the final multiplier effect on equilibrium GDP. Signup and view all the answers

How does countercyclical fiscal policy work?

It is a policy that changes government purchases or net taxes to reverse or prevent recession or boom. Signup and view all the answers

Why does countercyclical fiscal policy fail?

It fails because the government is artificially trying to bring the economy back on its feet rather than allowing the private sector to adjust on its own. Signup and view all the answers

Study Notes

Autonomous Consumption Spending

Autonomous consumption spending refers to consumption that occurs regardless of income level, represented graphically as a vertical line at zero disposable income.

Factors Influencing Autonomous Consumption

Influenced by assets such as houses, expectations of future income, borrowing difficulties, and societal standards for minimum living conditions and poverty perceptions.

Causes of Recessions

Recessions in 1953, 1974, 1981, and 2001 were triggered by government attempts to control inflation through tightening monetary policy during crises like the Korean War and the dot-com collapse.

Causes of Economic Expansions

Economic expansions in the early 1950s, late 1960s, 1980s, and 1990s were driven by increased defense spending due to foreign conflicts, recovery from oil crises, and the tech boom of the internet.

Consumption Function

The consumption function illustrates a positive relationship between real consumption and real disposable income, indicating higher consumption as disposable income rises.

Impact of Taxes and Autonomous Consumption

A decrease in net taxes or an increase in autonomous consumption leads to an upward shift in the consumption function; conversely, increases in net taxes or decreases in consumption have the opposite effect.

Marginal Propensity to Consume (MPC)

MPC is defined as the slope of the consumption function, representing how much consumption spending increases for every additional dollar of disposable income.

Aggregate Expenditure (AE)

AE represents the total spending by households, businesses, governments, and foreign entities on U.S. produced goods and services over a specified time frame.

Finding Short-Run Equilibrium GDP

Short-run equilibrium GDP is determined at the output level where aggregate expenditure equals overall output.

Cyclical Unemployment Causes

Cyclical unemployment arises in the Keynesian model due to low total spending, resulting in decreased production and employment opportunities.

Expenditure Multiplier

The expenditure multiplier measures the change in equilibrium real GDP caused by a one-dollar change in autonomous consumption, investment spending, government purchases, or net exports.

Reverse Operation of Expenditure Multiplier

When investment spending decreases, equilibrium GDP falls by a multiplier effect similar to how increases in spending raise GDP.

Automatic Stabilizers and the Multiplier Effect

Automatic stabilizers mitigate the multiplier effect by reducing the incremental spending in each round of the multiplier process, leading to a smaller overall impact on equilibrium GDP.

Countercyclical Fiscal Policy

This policy involves adjusting government purchases or net taxes aimed at reversing or preventing economic recessions or booms.

Limitations of Countercyclical Fiscal Policy

Countercyclical fiscal policy often fails as it relies on government intervention rather than allowing the private sector to adjust and stabilize the economy naturally.

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Description

Test your understanding of the Keynesian Model in macroeconomics with these flashcards. Each card defines key concepts such as autonomous consumption spending and factors influencing consumption. Perfect for students aiming to enhance their grasp of economic theories and principles.