CLEP Macro Economics

Keynesian economics believe that fiscal policies such

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Keynesian Economics – believe that fiscal policies (such as changing taxes and/or government spending) should be used in order to change aggregate demand (AD) and close inflationary or recessionary gaps
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Comes from British economist, John Maynard Keynes o Calls the total planned spending on final goods and services planned aggregate expenditure (PAE) o PAE helps calculate output numbers, often differs from actual spending Believe that monetary policies such as changing interest rates or money supply had little impact on changing aggregate demand, Assumption that firms do not change prices, try to meet demand at fixed prices o Consistently changing prices would be costly Example: if the cost of a newspaper changed every time the price of ink and paper changed Is considered middle ground between socialism and laissez-faire capitalism Teaches there should be a large private sector AND a large governing sector Asserts that economies based on capitalism have microeconomic instability and that government is required to properly stabilize the economy Used to explain the Great Depression was caused by decreased aggregate demand Keynesian economist were the primary economist responsible for fiscal policies during the Great Depression Investments – an organizations spending on final goods and primarily capital 3 categories’ of investments o Business Fixed o Residential o Inventory Business Fixed Investments – is the purchase of long-term goods and services that will hopefully increase the organizations capacity for production Example: investments in machinery and factories Residential Investments – the building of new homes and apartment buildings Inventory Investments – is the addition of unsold goods to a company’s inventory These investments can hurt or help an organization depending on value of inventory Human Capital – intellectual property, employee skills, abilities, knowledge Education and experience Classical Economics – the school of thought that the economy is self-regulating (no government intervention) and that full employment will return over time without outside intervention According to classical economist, an increase in money supply results in an increase in aggregate demand, which in turn leads to higher prices Prices and wages are affected when the money supply changes, however quantity of output (real GDP) and employment do not change when the money supply changes Collusion – when firms act together to restrict competition Can include price fixing, which is illegal in the U.S. Concentration Ratio – a method of analyzing a monopoly by averaging the sales of the top four leaders in the industry
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If the top four leaders in an industry amount to over 50% of total sales there is said to be a shared monopoly Aggregate Expenditure Model (AE) – model is made up of GDP components. Helps track expansions and contractions in the business cycle
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Keynesian Economics believe that fiscal policies such as...

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