Keynesian Economics (money market and multiplier) Flashcards
(48 cards)
1
Q
According to the money market system, what acts as the signal influencing behaviour?
A
Price
2
Q
3 common beliefs of classical economists
A
- humans act in self interest
- markets maximise this self interest with prices acting as signals
- there is minimum government interference
3
Q
According to neo-classical economics, who is the driver of market forces, and what are market forces?
A
- the customer is the driver of market forces (price and demand)
4
Q
According to Keynesian economics, who can take action to alleviate unemployment?
A
- governments
5
Q
What is the traditional Keynesian Position?
A
- When the private sector is unstable there are fluctuations in investment which leads to high employment fluctuations
- in this case the government or Central bank have to intervene to stabilise employment rates.
6
Q
Governmental policies are mostly via ______ policies.
A
- fiscal policy
7
Q
What does Keynesian analysis do?
A
- it makes a distinction between planned and actual behaviour
8
Q
What is planned spending/saving/investment?
A
- the intended actions of households and firms.
9
Q
Actual spending/saving/investment
A
- realised outcome resulting from the actions of households and firms
10
Q
Full employment
A
- when those who want a job are able to find one, there are low involuntary unemployment.
11
Q
What dies the 45 degree line on the KC do?
A
- shows where aggregate expenditure = real GDP (national income)
- it is basically the capacity of the economy
12
Q
What is the expenditure function/aggregate (planned) expenditure?
A
- E = C + I + G + NX
13
Q
When does short-run equilibrium occur?
A
- where actual spending = planned spending
14
Q
An EQ below the the full employment level of output indicates there is a…
A
- deflationary gap
15
Q
An EQ above the full employment level of output indicates there is an…
A
- inflationary gap
16
Q
What can a government do to eradicate and inflationary/deflationary gap?
A
- they can influence the component of aggregate demand through fiscal and monetary policies
17
Q
Deflationary/output gap
A
- when expenditure is less than full employment output (E < Y)
18
Q
Inflationary gap
A
- when actual expenditure is greater than full employment output (E < Y)
19
Q
What is the multiplier effect?
A
- when fiscal policies lead to shifts in the aggregate demand (AD) and it increases income (Y) and therefore consumer spending (C).
20
Q
What purchases are said to have a multiplier effect on aggregate demand? Give an example
A
- government purchases
- ie a euro of government purchases can generate more than a euro of aggregate demand (it multiplies is)
21
Q
How can the multiplier effect be strengthened?
A
- by the response of investment to higher levels of demand
22
Q
Accelerator principle
A
- refers to the relationship between the rate of aggregate demand and the rate of change in investment
23
Q
Marginal Propensity to Consume (MPC)
A
- measures how much more individuals will spend (consume) for every additional £ of income instead of saving
24
Q
Marginal Propensity to Save (MPS)
A
- the fraction of additional income that individuals will save rather than consume
25
Formulas for the multiplier
- 1/(1 - MPC) or 1/MPS
26
True or False: the change in income is determined by the MPC
- True
27
Autonomous expenditure
- expenditure that does not change regardless of income ie food and clothes
28
What are savings, imports, and taxes classified as?
- withdrawals from the circular flow of income
- endogenous as they are directly related to changes in income
29
Formula for Marginal Propensity to Withdrawal (MPW)
- MPW = MPT + MPS + MPM
30
Formula for the extended multiplier (k)
- k = 1/MPW
31
Relationship between MPW and the multiplier k
- the higher the MPW, the smaller the multiplier (so the shallower the slope of the expenditure line)
- the lower the MPW the larger the multiplier (and the steeper the slope of the expenditure line)
32
The _____ of the expenditure line is dependent on how much of any extra $1 of income is withdrawn
- slope
33
Money
- any asset that can easily be used to purchase goods and services
34
Currency in circulation
- cash held by the public
35
Checkable bank deposits
- bank accounts that allow customers to easily access their funds using checks ( and debit cards, or electronic transfers)
36
Money supply
- the total value of financial assets in the economy that are considered money
37
Monetary aggregate
- an overall measure of the money supply
38
What do M1 through 3 include?
- M1 includes most liquid forms of money
- M2 includes M1 as well as near-moneys which are financial assets that can't be used as a medium of exchange but can be converted to do so
- M3 includes M2 and large time deposits in banks
39
T-account
- tool used for analysing a business's financial position by showing its assets and liabilities
40
Bank reserves
- currency banks hold in their vaults + their deposits at the Central Bank
41
Reserve ratio
- fraction of bank deposits that a bank that a bank holds as reserves
42
Excess reserves
- a bank's reserves above its required reserves
43
Money multiplier
- the ratio of the money supply to the monetary base
- increase in the monetary base causes the money supply to increase by a multiplied amount.
44
Monetary base
- the sum of currency in circulation and in bank reserves
45
What does the money supply curve represent?
- it represents the relationship between the quantity of money supplied in the economy and the interest rate
46
Money demand curve
- shows the quantity of money demanded at each interest rate
- Its downward slope expresses the negative relationship between the quantity of money demanded and the interest rate.
47
What does Md = Ms determine?
- the equilibrium value of money and price level
- nominal interest rate
48
An increase in the money supply will shift the Ms curve to the right. What will this lead to?
- a lower value of money as more money is circulating the economy
- an increase in the price level (inflation)
