Economics 101Chapter13

Economics 101Chapter13 - 1 Part IV: The Keynesian...

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Part IV: The Keynesian Revolution: 1945 - 1970 Objectives for Chapter 13: Basic Keynesian Economics At the end of Chapter 13, you will be able to answer the following: 1. According to Keynes, consumption depends on (is a function of) what? 2. Define "disposable income" (review) . "average propensity to consume". "marginal propensity to consume" . 3. From a number set, calculate the marginal propensity to consume and the marginal propensity to save. From this number set, calculate the equilibrium real GDP . First, do so with only consumption and investment spending. Then, add it government purchases. Finally, add in net taxes and net exports. (Relate to the circular flow model.) 4. If real GDP is below (or above) equilibrium real GDP, why will it rise (fall) to equilibrium? (That is, why can these other levels of real GDP NOT be equilibrium?) What is meant by "unintended inventory investment"? 5. What is a recessionary? an inflationary (expansionary) gap? Show these on the aggregate demand - aggregate supply graph. (Review) 6. Explain why a change in investment spending (or government purchases) causes equilibrium real GDP to change by more than the change in investment spending (or government purchases). 7. What is meant by the “multiplier" ? 8. How is the expenditures multiplier calculated? Why is the real expenditures multiplier lower than indicated by the multiplier formula? 1
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Chapter 13: Basic Keynesian Economics (latest revision May 2006) Introduction John Maynard Keynes, arguably the most influential economist of the 20 th century, was introduced in the previous chapter. The Great Depression of the 1930s had called into question the Classical View of Economics, a view that had prevailed for over 150 years. Remember that the basic conclusion of the Classical View was that cyclical unemployment would not last very long. Since unemployment rates would fall automatically, there was no need for any government action to lower them. But rates of cyclical unemployment had been very high from 1929 until the beginning of World War II in 1941. In the previous chapter, Keynes’ criticisms of the Classical View were discussed. In this chapter, we will examine the economic theory that Keynes developed to replace the Classical view. This theory is known as Keynesian Economics . It became somewhat influential after World War II and then became very influential in the 1960s. We can break this theory into just a few components: (1) consumption, (2) Equilibrium Real GDP, (3) inflationary and recessionary gaps, (4) multipliers, and (5) fiscal policy . Fiscal policy will not be discussed until Chapter 18. (1) Consumption Let us begin to understand Keynesian economics by examining its analysis of consumer spending. According to Keynes, consumer spending depends upon disposable income . This relationship is known as the consumption function . We described disposable income earlier. Disposable income is calculated as the National Income minus Taxes Paid plus Transfers
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Economics 101Chapter13 - 1 Part IV: The Keynesian...

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