Econ+102+lecture+11%2C+2-14-12+-+The+Keynesian+framework copy

# Econ+102+lecture+11%2C+2-14-12+-+The+Keynesian+framework copy

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Lecture 11:  The Keynesian framework Econ 102, Winter 2012 2/14/2012 1 Required reading : Ch 11: pp. 287- 306

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Outline 1. The spending multiplier 2. The consumption function 3. The investment function 4. The Keynesian Cross 2/14/2012 2
The short run Today, we begin the two-week process of building our model of short run fluctuations Ch 9 models the tendency of economies to increase output year over year Now, want to explain the SR “wobbles” around this trend time y = rGDP/L 3

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The short run Recall that the long run is a “full employment” model All resources are used, this resource stock determines output Ch 8 tells us that we should think of “full employment” as “the natural rate of unemployment” 2/14/2012 4
The multiplier In Chapter 11, it helps to impose the following assumptions (all of which we’ll relax as we progress): 1. Aggregate price is fixed, and producers are willing to increase quantity supplied at this fixed price Sometimes called the “sticky prices assumption 2. No government: G = T = TR = 0 3. Interest rate r is fixed/given 4. No international trade: EX = IM = NX = 0 2/14/2012 5

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The multiplier Suppose I come upon an inheritance of \$1 million, which I get as long as I can spend it all This is a change in autonomous spending : spending that is unrelated to the economic variables in our model 1. I buy a new house, a new car, a new wardrobe, etc. 2. This money becomes someone else’s income They save some and spend some (Yd = C + S) 3. The portion they spend becomes yet someone else’s income That person saves some, spends some 2/14/2012 6
The Multiplier A central question: how much does each save and spend? The marginal propensity to consume (MPC) : for each additional dollar of income, what fraction will you spend? Complementary concept: marginal propensity to save

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## This note was uploaded on 02/10/2012 for the course ECON 102 taught by Professor Rossana during the Winter '08 term at University of Michigan.

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Econ+102+lecture+11%2C+2-14-12+-+The+Keynesian+framework copy

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