WEEK 18

Question 1

the economy is a system of interconnected parts and

Answer 1

investment is the spark that drives its growth

Question 2

aggregate demand is….., it leads to increase in production and/or price

Answer 2

consumption + investment + government spending and (net beteern export (x) - (m) imports)

Question 3

simple keynesian model

Answer 3

key macroeconomic variables - GDP and national icnome are oftehn used inerchangeably

circular flow of income model - illustrates income flows between different sectors of the economy and their impact on aggerage demand

fluctuations in aggregate demand - economists believe that these fluctuations drive the business cycle

Question 4

Keynesian model development and assumptions

Answer 4

revisits the circular flow model and focuses on the determination of national income (GDP) and the effect of aggregate demand changes

the assumption are that prices are constant in the initial model-later effect on output and prices are considered

Question 5

(INJECTION)J = I+G+X

Answer 5

INVESTMETN GOVERMNET AND EXPORT

Question 6

(withdrawal) W = S+T+M

Answer 6

SAVING TAX AND IMPORT

Question 7

TO reachthe equilibrium the national income needs to be same AS expenditure (Y=E) and ALSO

Answer 7

injection = withdrawal

if there is any deviation from its equilibrium (only on short run)

Question 8

(Y) national income can only be

Answer 8

=Cd + w (withdrawal)

Question 9

EXPENDITURE CAN BE FROM

Answer 9

Cd (from househol who asedk to produced the product + J (injections)

Question 10

THE 45 DEGREE LINE IS CALLED

Answer 10

KEYNESIAN CROSSING

Question 11

TJE CONSOMPTUON LINE IS

Answer 11

Cd SHALLOWER and flatter than y beacuse it includes W and Cd doesnt

Question 12

if aggergate expensiture (e) exceeds national income (y)

Answer 12

national income will rise to meet the increase in spending , use more factro of production

Question 13

given the followign data whjat will happen to equilibrium national income? C=100 I=20 M=30 X= 25 S=18 T=28 G=26

Answer 13

decrease IF J =W we already in equilibrium
if W is more than J WE DECREASE IF J is better than W we increase

j=71 I,G,X

w=76 S,T,M

since w>J
more leakes from the economy than injection into, leads to fall in aggregate demand and hence decrease in national income

Question 14

THE MULITPIER

Answer 14

K=change in national income / change in expenditure

the rise in GDP is larger than the rise in the aggregate expenditure

Question 15

Example 10 billion rise in aggregate expensditure could lead to 30 billion rise in GDPPP with a multiplier of

Answer 15

3

Question 16

marginal propensity to consumer (MPC)

Answer 16

DETERMINES THE SIZE OF THE multiplier with higher MPC leading to a larger multiplier

mpc(under d) = change in Cd/ change in national income

mulitplier k= 1/(1-mpc)

Question 17

if a rise in nation income of 100 m causes cnsumption of domestic good and services to rise by 60 the multiplier is

Answer 17

mpc=change in consumption/ change in national income = 60/100= 0.6

k = 1/(1-0.6) = 2.5

Question 18

aggregate supply (depends on aggerage demand up to full emplyement income)short run SRAS

Answer 18

-Flexibility of aggeragte supply shows how output responds to a change in aggerage demand

• various perspecitve on aggerage supplu

-extreme keynesian postion

SRAS horizontal up to Yunderf= changes in AD purely refelcrted in real output Y

SRAS vertical at Yunderf

Question 19

keynesian position

Answer 19

at all the time business face increase in demand they will increase their output only without increasing the price until they reach a position where we exhaust all our resources and reach potential level

then any increase in AD is oing to e increased only in price

Question 20

increase in the prices or inflation is only going ot happen when

Answer 20

we reach our potential level

when the gap between actual production and the potential production is its minimum value

Question 21

mainstream position the AS is a curve and not a straigh line because

Answer 21

diminishing returns

chnage in everything short term but not all of them

Question 22

new classicist argue that the short run AS is vertial at potentila outputl YP assumptions

Answer 22

continuous market clearing - all markets adjust to equilibrium continuously

rational expectations-people use all available info to predict macroeconomic variable accurately

potential level at all times

only place we see an upwards detterent is when we have an upwards trend , where there is no expectaion about increasing AD

increase their production

Question 23

mainstream

Answer 23

we can see some inflation before we reach potential level

Question 24

keynesian point

Answer 24

no inflation before we see potential level