Principles of Macroeconomics – Keynesian Model (Lecture 8.1)

Principles of Macroeconomics – Keynesian Model (Lecture 8.1)

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Principles of Macroeconomics – Keynesian Model (Lecture 8.1) The Keynesian model describes the economy in the very short run when prices are fixed. In Keynesian theory, all prices are fixed. o So an increase in demand leads to an increase in output Neo-classical theory, all prices are flexible. o So an increase in demand leads to an increase in prices. In the very short run all prices are fixed (Keynes) In the long run all prices are flexible (Neo-classical) In the short run prices in goods markets are flexible but wages are fixed. The circular flow model The multiplier An increase in investment (or any other component of autonomous expenditure) increases aggregate expenditure and real GDP. The increase in real GDP leads to an increase in induced expenditure. The increase in induced expenditure leads to a further increase in aggregate expenditure and real GDP. So real GDP increases by more than the initial increase in autonomous expenditure.
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Unformatted text preview: The two sector model Actual aggregate expenditure is always equal to real GDP. Aggregate planned expenditure equal to real GDP at equilibrium. The open economy Aggregate planned expenditure increases as real GDP increases. However, only consumption expenditure and imports increase with real GDP. Induced expenditure is the sum of the components of aggregate expenditure that vary with real GDP Autonomous expenditure is the sum of the components of aggregate expenditure that are not influenced by real GDP. Aggregate Planned Expenditure and Real GDP The marginal propensity to consume ( mpc ) is the fraction of a change in disposable income spent on consumption. o It is calculated as the change in consumption expenditure, D C , divided by the change in disposable income, D YD , that brought it about. o That is: mpc = C / YD The open economy...
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Principles of Macroeconomics – Keynesian Model (Lecture 8.1)

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