FEB 1Simple+Keynesian

FEB 1Simple+Keynesian - The Aggregate Expenditure Model:...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
The Aggregate Expenditure Model: Keynesian Influences In the 1930’s, John Maynard Keynes challenged the simple view that savings depended only on the interest rate. He introduced the idea that savings depended on disposable income. We have already noted that personal savings depends on The real rate of interest Disposable income Purchasing power of net assets Expected future income
Background image of page 1

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

View Full DocumentRight Arrow Icon
We will now investigate a simple Keynesian model, with S a function of disposable income. We will then reincorporate the effects of the real interest rate on savings. Simple Keynesian model : Keynes reformulated the classical model, so that investment still depend on the rate of interest, but savings and consumption depend on disposable income , not the interest rate.
Background image of page 2
1. Consumption depends on income: C = C(DI) where DI = disposable income DI = Y - Taxes 2. Fundamental Psychological Law of Consumption: When disposable income rises, consumption rises, but by less than the increase in disposable income. 0 < C/ DI < 1 C/ DI - marginal propensity to consume, or mpc.
Background image of page 3

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

View Full DocumentRight Arrow Icon
($TRILLIONS) Y C S 1.0 2.0 -1.0 2.0 2.8 -0.8 3.0 3.6 -0.6 4.0 4.4 -0.4 5.0 5.2 -0.2 6.0 6.0 0.0 7.0 6.8 0.2 8.0 7.6 0.4 9.0 8.4 0.6 10.0 9.2 0.8 11.0 10.0 1.0 12.0 10.8 1.2
Background image of page 4
($TRILLIONS) Y C S I 1.0 2.0 -1.0 1.0 2.0 2.8 -0.8 1.0 3.0 3.6 -0.6 1.0 4.0 4.4 -0.4 1.0 5.0 5.2 -0.2 1.0 6.0 6.0 0.0 1.0 7.0 6.8 0.2 1.0 8.0 7.6 0.4 1.0 9.0 8.4 0.6 1.0 10.0 9.2 0.8 1.0 11.0 10.0 1.0 1.0 12.0 10.8 1.2 1.0
Background image of page 5

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

View Full DocumentRight Arrow Icon
Aggregate Expenditure and Equilbrium 0 2 4 6 8 10 12 0 1 2 3 4 5 6 7 8 9 10 11 12 Real GDP AE AE=C+I C AE=Y F C AE=C+I E
Background image of page 6
When I = 1.0,
Background image of page 7

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

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 24

FEB 1Simple+Keynesian - The Aggregate Expenditure Model:...

This preview shows document pages 1 - 8. Sign up to view the full document.

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