Ch 27 - Keynesian Macro Model (I)

Sunday, February 05, 2012

1:00 AM

Keynesian Model assumptions:

• Prices stay constant
• No supply constraints

 

Expenditure and GDP

• Increase in read GDP increase aggregate expenditure
• Increase in aggregate expenditure increases real GDP

 

Induced Expenditure	Consumption M (imports)
Autonomous Expenditure	Investment Government Expenditure X (Exports)

 



 

	Disposable income (spent on consumption or savings)
Y	Aggregate income
T	Net taxes

 



 

C	Consumption
S	Savings

 

 Consumption function

 



 

C	Consumption
b (aka MPC)	Marginal propensity to consume
Y	Income (assuming no taxes)

 



 

MPC	Ratio of change in consumption and change disposable income

 



 

MPS	Marginal propensity to save

 



 

 





 

APC	Average propensity to consume (falls as level of income rises)
APS	Average propensity to save

 

 

Move along the consumption function

• Disposable income

 

Shifts consumption function:

• Real interest rates (inverse)
• People consume more when borrowing is cheap
• Wealth
• Expected future income (direct)

 

 Planned Investment Spending

 

Determinants of aggregate investment expenditure:

• Real interest rate
• Changes in level of sales
• Business confidence

 

Real interest rate	Opportunity cost of using money for investment in fixed goods Opportunity cost of holding an inventory Affect residential construction Inversely affect Investment expenditure
Changes in Sales	Directly affect stock of inventories
Business confidence	Direct affect

 

 

 Aggregate Expenditure Function

 



 



 

a	Autonomous expenditure (when disposable income = 0)
b	MPC (assuming no gov and foreign sector)

 

Equilibrium expenditure

 

Shifts the AE function:

• Autonomous spending
• I, G, X

 

Changes the slope of AE:

• Change in MPC

 

 

 Multiplier

 

Multiplier

Amount which a change in autonomous expenditure is magnified to determine the change in equilibrium expenditure and real GDP.