Keynesian Economics Flashcards
(25 cards)
Classical Economics
The belief that is based on Say’s law. It has very flexible prices and the economy will be able to regulate itself.
Say’s Law
A law stating that supply creates own demand, which in theory regulates the economy automatically.
Flexible Prices and Wages
Price levels respond to any shift of the curves. Only in classical range.
Internal Fluctuations
events like saving causes the leaks in the economy.
External Fluctuations
War, trade issues etc.
Keynesian Economics
The economy when in recession needs a government acting as a buffer.
Disposable Income
The income left after accounting taxes. It is the money used for spending and saving.
Aggregate Expenditures
The total consumption that our country uses that go towards GDP.
Average propensity to save
The amount saved compared to income. Saving/income
Average propensity to consume
The amount consumed compared to total disposable income.
Marginal Propensity to save
The proportion of change in income save. dS/dI
Marginal Propensity to consume
The proportion of change in income consumption. dC/dI These do not typically change when AE changes.
GDP Multiplier
How much the economy will change if one value in the GDP rises or falls.
Dissavings
Spending more than current incomes. Is possible due to borrowing.
Full employment
Utilizing all resources and labour force to reach the potential GDP.
Inflationary Gap
When the AE equilibrium point is greater than full employment.
Recessionary Gap
When the AE eq point is less than the FE.
Balanced Budget Multiplier
Measures aggregate production triggered by change in taxes from the government.
Shortcomings of AE model
Does not illustrate price level changes Ignores most demand pull inflation Limits real GDP to FE No Cost Push inflation No self correcting.
AD Curve (Slope)
Real output that buyers want to buy at each level.
Real Balances: At high prices, the purchasing power is low and people are better off saving.
Interest Rate: Higher prices increases demand for money
Foreign Purchases: Expensive goods cause more input goods to be bought.
AD Determinants
Consumer Spending Wealth Expectations Debt Taxes Investment Spending Expected returns (Unused capital, business taxes, business expectations) Govt Spending Exports
AS Determinants
Business expectations INVESTMENT Taxes Abundance or Shortage of Resources PRODUCTIVITY
LRAS vs SRAS
SR is where the economy is producing now, while LR is the full employment.
Fiscal Policy
A way in which the government controls and regulates the economy by controlling consumption and taxes.
