Chapter_13-07 - John Maynard Keynes Most influential...

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  John Maynard Keynes Most influential economist of the 20 th  century Published  The General Theory of Employment, Interest, and Money  in 1936 Keynes’ main ideas o A decline in aggregate spending may cause output to fall below  potential output for long periods of time o Stabilization policy could be used to reduce or eliminate the output gap Government spending increases and tax reduction could  increase planned expenditures to restore full employment Modeling Fluctuations Goal is to develop a model of how recessions and expansions may arise  from fluctuations in planned spending o The basic Keynesian model will be the focus Spending is determined by income Short-Run model – Prices preset Output, not prices, respond to spending changes in the  short-run Assumptions Planned expenditures are induced Total planned expenditures change with GDP In the short run, firms meet the demand for their products at preset prices Do not respond by changing their prices Set a price for some period and satisfy the quantity demanded at that price Produce just enough to meet their customers’ orders Prices Preset in Short-Run
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In the short-run, stores post prices and sell product at those prices Changing prices is costly so it is infrequent Menu costs: The costs of changing prices Printing a new menu Remarking merchandise In the short-run, changing prices may not significantly influence quantity  demanded Other factors may be more important Expectations of future purchasing power Prior spending imbalances Planned Aggregate Expenditure Planned Aggregate Expenditure (PAE) Total planned spending on final goods and services Planned C, G, and NX are assumed equal to actual C, G, and NX Four components of PAE Consumer expenditure (C) Planned Investment (Ip) Government purchases (G) Net exports (NX) Planned vs. Actual Aggregate  planned  expenditure
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Planned  may differ from  actual  for firms When a firm sells either less or more of its product than expected I = Ip + Iu I is actual investment, Iu is unexpected or unplanned investment Iu is the unplanned change in business inventories For households, governments, and foreign purchasers we can reasonably  assume that  actual  equals  planned Unplanned Investment Suppose a firm’s actual sales are less than expected Warehouses fill up Actual investment is greater than planned investment The extra inventory becomes part of actual investment I > Ip since Iu is positive Ip is planned investment I   is   actual investment, Iu is unplanned investment Unplanned Investment If a firm sells more than expected I < Ip   since Iu is negative The firm planned on increasing inventories more than it actually did, or the  decline in inventories is larger than planned Planned Aggregate Expenditure
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This note was uploaded on 03/30/2009 for the course ECON 202 taught by Professor O during the Spring '09 term at Michigan State University.

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Chapter_13-07 - John Maynard Keynes Most influential...

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