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ECN 101 Lecture Notes - Lecture 21: Keynesian Economics

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orangeminnow841
21 Dec 2020
School
ACC
Department
Economics
Course
ECN 101
Professor
Towler

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Document Summary

In keynesian theory, output is determined by what people want to spend- planned aggregate expenditure (pae) firms produce the amount they expect they can sell, but will adjust to. This suggests that ip > i - more stock was sold than expected. There is an unplanned decrease in inventories, acting as a signal to firms to boost production (y), as firms cannot have no stock. This induces an increase in c and s, moving along the pae curve, until equilibrium is reached again, where y meets pae. This suggests that ip < i- selling less stock than they had expected. There is an unplanned increase in inventories, acting as a signal to firms to decrease production (y) as it is costly for firms to hold idle stock. This induces a decrease in c and s, moving along the pae curve, until equilibrium is reached again. Illustrating sr equilibrium on diagram, featuring withdrawals (leakages) and injections.

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Related Questions

a) In the AD-AS model, stagflation does not persist, because the working of the self-correcting mechanism of the economy _____ the level of output and _____ the price level until the economy eventually returns to a long-run equilibrium state, where actual output _____ potential output.
decreases; decreases; falls short of
increases; decreases; equals
decreases; increases; exceeds
decreases; increases; equals
increases; decreases; exceeds
b) The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that
Y* is independent of the price level and that actual output Y > Y* in the long run
Y* equals actual output (Y) in the long run
Y* is independent of the price level and that actual output Y = Y* in the long run
Y* is independent of the price level
Y* is independent of the price level and that actual output Y < Y* in the long run
c) Stagflation arises in the context of the AD-AS model when some external factor causes
the LRAS curve to shift to the right
the AD curve to shift leftwards
the SRAS curve to shift downwards
the SRAS curve to shift upwards
the AD curve to shift rightwards
d) If the SRAS curve is positively sloped, then a decrease in the demand for Canadian-made goods in Europe will lead to _____ in the price level, in the short run.
either an increase or a decrease
no change
an increase
a decrease
an initial increase, and then a decrease
e) Which of the following will shift the aggregate demand curve to the right?
Consumers become pessimistic about the future
A new technology is developed that will increase profits
Income taxes are raised
Foreign economies fall into recession, reducing their demand for domestic exports
The government reduces purchases to balance the budget
f) Suppose a stock market crash decreases the stock of household wealth and therefore causes autonomous consumption to fall. Which of the following is the likely result?
A leftward shift the AD curve
There will be no movement of the AD curve
A movement down the AD curve
A movement up the AD curve
A rightward of the shift the AD curve
g) An economy is characterized by the AD equation P = 200 ? 0.02Y, SRAS equation P = 100 and LRAS equation Y* = 5000. In the absence of any change in policy or exogenous shocks, this economy will achieve a long-run price level of
100
110
120
90
105
h) The AD-AS model depicts a self-correcting economy. This means that the price level in the model adjusts automatically in response to a(n) _____ gap, so as to eliminate the _____ gap in the long run, without requiring any help from government policies.
recessionary; recessionary
recessionary; expansionary
expansionary; expansionary
output; output
expansionary; recessionary
i) The aggregate demand curve shows
the amount of planned aggregate expenditure (and output) at the current price level
the amount of planned aggregate expenditure (and output) at an average price level
the amount of planned aggregate expenditure (and output) at a constant price level
the amount of planned aggregate expenditure (and output) at various price levels
the amount of planned aggregate expenditure (and output) at last year's price level
j) Consider an economy initially at long-run equilibrium with output (Y) equal to potential output (Y*). If the SRAS is positively sloped, then a shift to the right of the AD curve will lead to _____ in the price level, in the short run. In the long run, the SRAS curve will shift to the _____ and the equilibrium will be at __________.
an increase; left; Y = Y*
a decrease; right; Y > Y*
an increase; right; Y = Y*
a decrease; left; Y > Y*
no change; left; Y = Y*

1. The multiplier helps explain

   

A. why a decrease in taxes causes real Gross Domestic Product (GDP) to fall by more than the amount of the decrease in taxes.
   

B. why a fall in investment cause real Gross Domestic Product (GDP) to rise by more than the amount of the decrease in investment.
   

C. why a rise in government expenditures causes real Gross Domestic Product (GDP) to rise by more than the amount of the increase in government spending.
   

D. why an increase in disposable income causes real Gross Domestic Product (GDP) to rise by less than the amount of the increase in disposable income.

 

2. If the marginal propensity to save (MPS) increases, the multiplier

   

A. decreases.
   

B. can either increase or decrease, depending on what happens to the marginal propensity to consume (MPC).
   

C. stays the same.
   

D. increases.

 

QUESTION 60

The investment function will shift when there is a change in

   

A. the opportunity cost of retained earnings.
   

B. firms' profit expectations.
   

C. the cost of borrowing.
   

D. the interest rate.

1.43 points

QUESTION 61

In the Keynesian model, whenever planned saving exceeds planned investment,

   

A. there will be unplanned inventory accumulation.
   

B. real GDP will not be influenced.
   

C. the interest rate will remain unchanged.
   

D. there will be unplanned inventory depletion.

 

1.43 points

QUESTION 62

In the Keynesian model, whenever planned saving is less than planned investment,

   

A. there will be unplanned inventory depletion.
   

B. the interest rate will remain unchanged.
   

C. there will be unplanned inventory accumulation.
   

D. real GDP will not be influenced.

 

1.43 points

QUESTION 63

Government purchases

   

A. are determined by the political process.
   

B. are determined by the public.
   

C. are influenced by interest rates.
   

D. are determined by suppliers.

 

1.43 points

QUESTION 64

If, at some level of output, total planned real expenditures are less than real Gross Domestic Product (GDP),

   

A. real GDP will either fall or remain unchanged, depending on the MPC.
   

B. real GDP will rise.
   

C. real GDP remains unchanged.
   

D. unplanned inventories will increase and real GDP will fall.

 

1.43 points

QUESTION 65

When the economy is operating at the equilibrium level of GDP, we know that

   

A. total planned real expenditures equal real GDP.
   

B. real net exports equal inventory changes.
   

C. planned real investment spending equals real net exports of zero.
   

D. total planned real consumption expenditures equal real GDP.

 

1.43 points

QUESTION 66

One divided by the marginal propensity to save (MPS) is the formula for

   

A. the inverse of the multiplier.
   

B. the multiplier.
   

C. one minus the multiplier.
   

D. autonomous consumption.

 

QUESTION 67

Thinking like an economist would, which is true of investment?

   

A. Investment represents spending on capital goods.
   

B. Investment is a stock concept.
   

C. Investment is putting money into stocks and bonds.
   

D. It is the portion of disposable income that is not used for consumption or saving.

 

QUESTION 68

Other things being equal, if input prices rise in a country, then there would be

   

A. cost-push inflation.
   

B. demand-pull inflation.
   

C. cost-pull deflation.
   

D. more production and a lower price level.

 

QUESTION 69

In the short run, if the price level rises, then the overall economy can temporarily produce beyond its nominal capacity. One reason for this is that

   

A. existing capital equipment can be used more intensively.
   

B. wage rates rise almost simultaneously with the price level.
   

C. the unemployment rate usually rises dramatically along with the price level.
   

D. workers can be switched from counted to uncounted production.

Assignment 4 (Chapter 23) Sequestration 2013

Dear Colleagues,

Using the goods and services model from the text (what I have labeled the 'Commodities Model' in my syllabus or the Keynesian Cross), please offer a basic analysis of the sequestration of expenditures by the Federal Government that took effect on March 1st. Please limit your analysis to an expenditure equation containing only personal consumption expenditures (C) and planned investment (Io). (The aggregate expenditures equation would be limited to AE = C + Io.) Please note that I want you to ignore the impact of any direct reduction in governmental expenditures upon aggregate expenditures as is discussed in chapter 24. In particular, discuss and model the effects of the Sequestration on C. Also, would there be a possible effect on Io? Please explain the conclusions that you reach. Before beginning your analysis please read the articles listed below:

Sequestration: The Truth Behind The Spending Cut€, Mani.

http://www.istockanalyst.com/finance/story/6318811/sequestration-the-truth-behind-the-spending-cuts

Paragraph 7 in particular in the article above

Fiscal Multipliers, the IMF & the OBR, Weldon, Duncan.

http://touchstoneblog.org.uk/2012/10/fiscal-multipliers-the-imf-the-obr/

Deleveraging Shocks and the Multiplier (Sort of Wonkish)€, Krugman, Paul,

http://krugman.blogs.nytimes.com/2012/10/09/deleveraging-shocks-and-the-multiplier-sort-of-wonkish/

In your analysis, please use the Keynesian Theory of Consumption as the model to represent household expenditures. You may assume that the aggregate expenditure function (line) has only consumers and business, and business expenditures are not dependent upon income (as presented in the text).

Of what importance is the discussion of the multiplier mentioned in the last two articles?

Is it possible that business expectations about the future will change?

What would change in the model as a result of this change in expectations (Please discuss the potential impact on inventories)?

As you perform your analysis, you do not have to specify exact values on the axes. Your response will be graded upon your ability to determine the direction in which incomes will change, either increasing or decreasing, due to the sequestration and if the change will be large or small. (Recall that income, Y, is represented on the horizontal axis in the Keynesian Cross model.) In your model, be sure to begin your analysis with aggregate expenditures at pre-sequestration levels and equilibrium income. Then indicate the appropriate movement of the consumption function and business planned investment and the effect on equilibrium income.

Also, provide a brief explanation of how unplanned investment would change as a result of the sequestration and how the unplanned investment causes equilibrium income to increase or decrease.

The book Principles of Economics, Tenth Edition, Chapter 23 - Sequestration 2013.