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Description
Flashcards by marinamcantwell, updated more than 1 year ago
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Created by marinamcantwell
over 11 years ago
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| Question | Answer |
| Keynesian Cross Diagram & account for the Keynesian Multiplier effect | So named by the work carried out by John Maynard Keynes. He wished to understand why economies tended to progress in a cycle of booms and slumps ( the business cycle) |
| Why economies occasionally experienced prolonged recessions ? | The boom periods were characterised by high and rising levels of output and employment while the slumps were characterised by rising unemployment and falling output. |
| He argued that the level of output firms will be willing to produce is determined by the AD for goods and services in the economy. | The level of output firms are will to produce will in turn determine the level of employment. The level of AD drives the economy. |
| AD is concerned with the total level of desired (or planned) expenditure in the economy and has four components originating from four different sources. | 1) Households (C) 2) Firms ( I ) 3) Government (G) 4) Foreign Sector (X - M) |
| To understand why AD might fluctuate we need to understand why the components of (C,I,G,X-M) might change. When we know this we can bring the components together to construct a theoretical model of the economy. | Firstly we look at a two sector model comprising of just households and firms ignoring government and the foreign sector. |
| Though similar to accounting identity for GDP AD is not the same thing as GDP. The components in AD relate to desired levels of output whereas GDP relates to realised outcomes. | Planned and realised outcomes may not necessarily coincide only doing so when the economy is in equilibrium. |
| By adding government to the model we have a closed model with government. By adding foreign sector we have an open model. Although all models lack realism they are important for analysis of macroeconomic relationships. | Two Sector Model Households derive their incomes from (wages, rent, interest and profits) from the services they provided to firms. |
| Households have a simple choice with regard the income they receive, they can either spend it or save it. Total Income = Y Household consumption = C and Savings =S | Therefore Y = C + S The consumption function is concerned with all factors that may influence consumption and the savings function is concerned with all factors that influence savings. |
| It is assumed that as income rises that savings will rise but not by the same amount. The proportion of any change in income that is spent is known as the marginal propensity to consume MPC | The proportion that is saved is known as the marginal propensity to save. MPS It follows that MPC + MPS = 1 |
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