Chapter8 - Chapter 8 The Keynesian Model CHAPTER SUMMARY...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 8 The Keynesian Model CHAPTER SUMMARY The classical theory relied on Say's law that states that supply creates its own demand. To the classical economists capitalism would guarantee an equilibrium (or stable) level of economic activity at full employment. Flexible wages, prices, and interest rates would ensure this. Keynes rejected the classical notion of Say's law. He argued that underspending was very likely. Keynes focused on aggregate demand (total spending) as being the key determinant to the level of macroeconomic activity---not aggregate supply which was the major focus of the classical economists. Aggregate demand (or total spending) equals the sum of consumption, investment, government and net export spending. This chapter focuses on consumption and investment spending (expenditures). Consumption spending is directly related to real disposable income and is expressed as an upward sloping consumption function. As income rises consumption spending rises and this is illustrated as movement along the consumption function. However, if there is a change in a nonincome determinant, such as expectations, wealth, the price level, the interest rate, or the stock of durable goods, this causes a shift of the consumption function (and therefore the saving function). The MPC equals the slope of the consumption function, the MPS equals the slope of the saving function. The MPC plus the MPS equals one. The business community undertakes investment spending. The investment demand curve illustrates the inverse relationship between the interest rate and the level of investment spending. The investment demand curve can shift if there is a change in expectations, technology, capacity
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 4

Chapter8 - Chapter 8 The Keynesian Model CHAPTER SUMMARY...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online