Study Guides (380,000)
CA (150,000)
WLU (5,000)
EC (400)
EC140 (70)
Study Guide

[EC140] - Midterm Exam Guide - Comprehensive Notes for the exam (32 pages long!)


Department
Economics
Course Code
EC140
Professor
Ken Jackson
Study Guide
Midterm

This preview shows pages 1-3. to view the full 32 pages of the document.
WLU
EC140
MIDTERM EXAM
STUDY GUIDE

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Chapter 27
Keynesian Model
The Keynesian model describes the economy in the short run when prices are fixed
1. Price level is fixed
2. Aggregate demand determines real GDP
The first macroeconomic model that was based not on price adjustment (microeconomic), but on
quantity adjustment to attain equilibrium flow rates of output income, and expenditure.
Central problem was deficient demand in the economy  ideal production capacity, prices which
were stable or falling during the Great Depression
To address the problem with a workable theory, Keynes made 2 assumptions
1. Prices are stable and can be treated as constant; there is no adjustment through changes in prices
2. Supply constraints, if they exist, are irrelevant
there was no way to incorporate price inflation into a model based on stable prices
Impetus for change to macro models came from the perceived breakdown of the unemployment-
inflation trade-off, most commonly illustrated with the Phillips curve
During the 1970s, models were developed that incorporated
1. Price adjustment mechanisms
2. Explicit supply sides
These new, improved macro models synthesized
1. The Keynesian model of the demand side
2. Growth models that addressed long-term supply capacity
3. Aggregate price adjustment similar to that used in Phillips Curve models
Endogenous/induced/dependent variable: theory tries to explain. This varies with national income.
The causation runs from change in national income to change in desired expenditure.
-Ex: income rises, increase amount you can spend on consumption goods. Vice versa.
Exogenous/autonomous/independent variable: influences value of endogenous variable but is
itself not explained in the theory. This does not vary with national income
-Ex: government spending on defense is not according to current GDP levels. But an increase in
defense spending will increase national income ($ spent by government = income to someone)
-Planned investment expenditure depends on interest rates and expectations, not income
-Government spending depends on government decisions, not on current income
-Export revenue depends on foreign income and exchange rate, not current domestic income
Economy-wide changes in wealth (aggregate change): If price level goes up, while the number of
dollars in bank deposits is unchanged, the quantity of real goods that the deposits will buy decreases
Simplest short run macro model “Keynesian Cross”
want to look at short run fluctuations from potential GDP create model based on economic theory
Theory: abstraction that attempts to explain how variables are related  simplifies reality
Theories contain assumptions about
1. Which variables are important
2. Conditions of application
3. Direction of causality
Simplifying assumptions
-Prices are constant: Firms can sell at current price – no P adjustment to excess demand/supply
- Firms stand ready to sell the quantities of goods that buyers wish to buy, the flow of goods is
determined sole by buyers “demand driven”
find more resources at oneclass.com
find more resources at oneclass.com
You're Reading a Preview

Unlock to view full version

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

-Main determinant of behaviour of real national income in the short run is desired expenditures
(flows): amounts households and firms wish to send in this time period
-No government on foreign sector: this will be relaxed, and these sectors added to the model,
after some understanding of the mechanics  how the fixed-price Keynesian model works
Consumption and saving plans
Consumption expenditure is influenced by many factors but the most direct is disposable income
- Aggregate income or real GDP minus net taxes plus transfer payments (Y – T) = YD = C + S
- To explore the 2 way link between real GDP and planned consumption expenditure
- If this rises, saving and consumption expenditure both rise  both depend on real GDP
Autonomous expenditure: amount of consumption expenditure that would take place in the short
run even if people had no current income
Induced consumption: consumption expenditure induced by increase in disposable income
Planned Consumption Expenditure – Keynes’ Theory
Keynesian consumption function assumes households can see only the current period
In more advanced theories of consumption, individuals are explicitly forward looking, and current
income is less important than measures of
1. Permanent income
2. Lifetime income
Keynesian consumption function and saving function
45 degree line: traces out combinations of consumption expenditure flow and income flow at which
planned consumption expenditure = income
- Allows us to compare (vertically) planned consumption expenditure flow and income flow
- If consumption function is at the 45 degree line, consumption spending = income, saving=0
- Vertical distance between 2 lines represents the planned flow of saving
horizontal axis = flow of income, and vertical =flow of planned/desired/consumption spending
find more resources at oneclass.com
find more resources at oneclass.com
You're Reading a Preview

Unlock to view full version