Chapter 10

Front 1

Keynes

Back 1

a decrease in consumption and subsequent increase in saving may not be matched by an equal increase in investment. Thus, a decrease in total expenditures may occur. Challenges the following views - (1) Say’s law holds, so that insufficient demand in the economy is unlikely. (2) Wages, prices, and interest rates are flexible. (3) The economy is self-regulating. (4) Laissez-faire is the right and sensible economic policy.

Front 2

Classical economists and Say’s law

Back 2

if consumption spending falls because saving increases, then total spending will not fall, because the added saving will simply bring about more investment spending. This will happen through changes in the interest rate. The added saving will put downward pressure on the interest rate, and at a lower interest rate businesses will borrow and invest more. Through changes in the interest rate, the amount of saving will always equal the amount invested.

Front 3

Keynes’ Assumptions

Back 3

First, the price level is assumed to be constant until the economy reaches its full-employment or Natural Real GDP level.Second, there is no foreign sector. In other words, the model represents a closed economy, not an open economy. It follows that total spending in the economy is the sum of consumption, investment, and government purchases (GDP=C+I+G).Third, the monetary side of the economy is excluded.Really focused on consumptionThe consumption function is the relationship between consumption (household sector spending) and disposable income.In the consumption function, consumption is directly related to disposable income and is positive even at zero disposable income:

Front 4

C= (C^0) + (MPC) (Y^d)

Back 4

C – Total consumption

(C^0) – Autonomous consumption - The part of consumption that is independent of disposable income.

MPC – Marginal propensity to consume - The ratio of the change in consumption to the change in disposable income: MPC = ΔC / ΔYd.(Y^d) – Disposable income – Income received less taxes.

Front 5

Efficiency Wage Models

Back 5

Models holding that it is sometimes in the best interest of business firms to pay their employees higher-than-equilibrium wage rates.

Front 6

Consumption Function

Back 6

The relationship between consumption and disposable income. In the consumption function used in this text, consumption is directly related to disposable income and is positive even at zero disposable income: C=(C^0)+ (MPC)(Y^d).