Lesson Plan - Keynesian Macroeconomics
- I. Keynesian versus classical macroeconomics
- - classical focuses on AS
- - asserts that AS is vertical
- - thus, AS determines employment while AD determines
prices
- - Keynesian focuses on AD
- - assumes that AS is horizontal, at least in the short-run
- - thus, AD determines employment while AS determines
prices
- II. Aggregate Expenditures
- - what is aggregate expenditures (AE)?
- - total value of domestic spending on goods and services
- - what does an Aggregate expenditures curve show?
- - what are the components of AE?
- - consumption
- - investment
- - government spending
- - net exports
- - Consumption and Saving
- - what is autonomous consumption?
- - what is induced consumption?
- - what is autonomous savings?
- - what is induced savings?
- - what is the relationship between disposable income
(Yd), Consumption (C), and Savings (S)?
- - Yd = C + S
- - graphics
- - the consumption function
- - what is the relationship between C and Yd?
- - how is S found on the graph?
- - the savings function
- - what is the relationship between S and
Yd?
- - what is the relationship between the two graphs?
- - what is the marginal propensity to consume (mpc)?
- - what is the marginal propensity to save (mps)?
- - mpc + mps = 1 (why?)
- - what is the average propensity to consume (apc)?
- - what is the average propensity to save (aps)?
- - apc + aps = 1 (why?)
- - other determinants of consumption (besides Yd)
- - wealth
- - household type
- - stocks
- - Investment (I)
- - why do we invest?
- - relationship between investment and expected rate of
return
- - other impacts on investment
- - cost of new capital
- - taxes
- - interest rates
- - effect of investment on Aggregate Expenditures
- - Government Spending (G)
- - what is autonomous government spending?
- - Net Exports
- - autonomous exports (X)
- - autonomous imports (M)
- - AE = C + I + G + (X - M)
- - but recall that C = Ca + mpc*Yd
- - so AE = Ca + mpc*Yd + I + G + (X - M)
- - what does the AE function look like graphically?
- - what is the relationship between C and National Income (Y)?
- - assume no taxes, no transfers, no retained earnings =>
Y = Yd = GDP
- III. Keynesian Equilibrium
- - What is Demand in the Keynesian model?
- - Aggregate Expenditures
- - additional assumptions
- - no government or foreign sectors
- - what is equilibrium?
- - equilibrium exists where Y (income or output) = AE
(demand)
- - graphically
- - what is the equilibrating mechanism?
- - planned vs. unplanned investment
- - what happens to unplanned investment (inventories) when Y
>
AE?
- - what happens to unplanned investment (inventories) when Y
<
AE?
- - the relationship of Savings to Investment at equilibrium
- - mathematical example
- - the multiplier - if autonomous expenditures (either C or I)
increase, by how much does
equilibrium output increase?
- - the multiplier effect - output increases by a
multiple
of the original increase in spending
- - why?
- - calculating the multiplier (Keynesian autonomous spending
multiplier = 1/mps)
- - what is the mps? the leakage from the system
- - other potential leakages?
- - taxes and imports
- - what is full employment output?
- - recessionary gaps
- - inflationary gaps
- - GDP gaps
- - what is the relationship between Keynesian AE and AD?
- - what impact does falling prices have on Keynesian
equilibrium?
- - graphically
- - recessionary, inflationary, and GDP gaps for AD