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9 Cards in this Set
- Front
- Back
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Classical theory
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Pre-depression economics theory. States business spending (I) is influenced by interest rates (i) .
- Low interest encouraged business to borrow money. - changes in one cause movement along the curve. |
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Keynes theory
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Business spending is influenced by future profit expectations.
- Business looks at percentage increase in profits and interest rates in the market. IF the expected return is greater than the interest rates in the market the business will borrow money. - example: If profit expectation is 4%, and the interest is 6%, borrowing does not occur. IF the interest is 3%, then borrowing does occur. |
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Non-interest rate factors which influence business spending
(List of four) |
1. New technology
2. Expectations of future 3. Business taxes 4. Capacity utilization rates |
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Capacity utilization rate
(Formula) |
Actual production over potential production
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Spending multiplier effect
(Concept) |
- A change in spending ( by C, I, G, or x) will have a major impact on GDP, Y , C, and S. ( Income, consumption, and savings.)
- This multiplier is applied to Income, consumption, and savings to show these values after this effects kicks in. |
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Spending multiplier formula
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- If you know the MPC, then you can find the MPS, and use the MPS to find the spending multiplier (MPC+MPS=100%)
Formula is 1/ MPS |
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Aggregate expenditure/demand output model (Kenyesian cross)
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* AE and AD are the same thing.
* The Keynesian cross is NOT AD; it is the interaction of AD and AS on a graph. The Keynesian cross diagram demonstrates the relationship between aggregate demand (shown on the vertical/ Y axis) and aggregate supply (shown on the horizontal/ X axis, measured by output). The cross shows a curve, drawn as a rising line since consumers will have a larger demand with a rise in disposable income, which increases with total national output. This increase is due to the positive relationship between consumption and consumers' disposable income in the consumption function. |
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Inflationary gap
(term) |
AD > GDP max
Occurs when... - Production over full employment levels - production cannot expand Results in... - jobs cannot be created - price increases, inflation increases |
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Recessionary gap
( term) |
AE < GDP
Occurs when... - Full employment over maximum production levels. Results in... - Deflation |
