Closed Economy

Front 1

Def of aggregate expenditure * formula

Back 1

Total spending of goods and services provided in an economy

AE=C+I+G

Front 2

What’s the formula of the consumption function and draw it

Back 2

In the Keynesian model of aggregate expenditure, autonomous consumption plays an important role.

C = a +bY. In this formula a is the level of autonomous consumption, where b is the marginal propensity to consume out of income.

autonomous consumption: This is the level of consumption which does not depend on income. The argument is that even with zero income you still need to buy enough food to eat

This is consumption that is influenced by levels of income. With rising income, people can spend more. In the diagram above, induced consumption is given by formula b(Y) where b equals the marginal propensity to consume

Front 3

Factors that influence consumption

Back 3

1) the level of inflation in the economy

2) expectation - the level of confidence

3) the level of income

4) changes in interest rate

5) changes in wealth and income distribution. When the income is more spread to the poors, The MPC and APC increases because it will increase consumption

Front 4

Def of saving function in the closed economy + formula

Back 4

S= -a+ by

S savings

-a dissavings

By income induced savings ( income that depends on the level of income)

B MPS/1-MPC

Front 5

Factors to influence savings

Back 5

1) inflation

2) interest rate

Front 6

What is savings equal to

Back 6

Investment

Front 7

Def of investment and what does it involve

Back 7

Is a spending on capital goods ( man made goods that can be used to produce other goods). It involves capital formation

Front 8

What does investment do to an economy

Back 8

Investment increases the production capacity of a country. But only improves the future living standards. Therefore investment should occur more frequency due to capital consumption

Front 9

NAme different types of investment

Back 9

1) autonomous investment

2) de-accelerator investment

Front 10

Def of autonomous investment

Back 10

Doesn’t depends if the changes of income or demand. This means even at 0 income, there will be investment.

This is called injections

Front 11

Draw the autonomous investment

Back 11

This level of investment doesn’t deepen on the changes of income or demand. This means at 0 investment, there will still be investment.

This is called injection

Front 12

Dw of de-accelerator

Back 12

Investment that depends of the rate of the growth of demand. Also knows as induced investment. This is investment that depends on the changes of national income

Front 13

Factors that influence investment

Back 13

1) changes in interest rate. When interest rate decreases, it encourages investment because People will borrow more

2) changes in demand

When changes in national income

3) government policy. Taxes

4) challenges in importing goods

5) changes in interest rates

Front 14

Def of government spending

Back 14

This is the spending on public goods, such as hospitals and education

Front 15

Def of government spending

Back 15

This is the spending on public goods, such as hospitals and education

Front 16

Factors that influence government spending

Back 16

1) political reasons. The current politicians want to influence more spending towards elections

2) the ability to borrow money. Or sell bonds

3) the need to provide merit goods, public goods and reduce income inequality

Front 17

Factors that influence net exports

Back 17

1) the income of a country. Increase in GDP, will lead to an increase in imports as more people will start buying from abroad

2) increase in GDP of other countries. This will increase exports

3) foreign exchange. It affected the external value of a currency( appreciation and depreciation)

Front 18

Def of equilibrium national income

Back 18

This is also known GDP

Front 19

Def of equilibrium national income

Back 19

This is also known GDP

Front 20

Mention the ways equilibrium national income can be determined

Back 20

1) it can be determined through the interaction of AS and AD ( when they intersect )

2) when AE intersects the keynasion 45 degree line

3) through injections and withdrawals

Front 21

What’s the keynasions 45 degreee, draw it and explain it

Back 21

It’s a line where expenditure equals to national income.

From the above diagram, equilibrium level of national income is determined by a point where AE line intersects with the 45 degree

If AE=C+I

If AE=C+I+G

Therefore, the introduction of I + G increases national income through the multiplier effect, which creates more income

Front 22

Explain the method to sermone equilibrium national income through injections and withdrawals

Back 22

Injections include I+G+X. These are the money that flow into the circular flow of income

Withdrawals. include S+T+M

Each injection avoids have a corresponding withdrawal. Therefore the national income equilibrium will occur at a pony where injections =withdrawals

Front 23

What’s the paradox of thirst

Back 23

For example, if people increased savings, it will lead to a fall in national income. The paradox of thrift is a concept that if many individuals decide to increase their current saving, it can lead to a fall in general consumption and will leads to a fall in future savings

Front 24

What’s the paradox of thrift

Back 24

For example, if people increased savings, it will lead to a fall in national income. The paradox of thrift is a concept that if many individuals decide to increase their current saving, it can lead to a fall in general consumption and will leads to a fall in future savings

Through the mulplier effect, it will cause a fall in national income and a low level of income will lead to an increase in MPC and APC. This will entuallu leads to a decrease in savings

Front 25

What’s the paradox of thrift

Back 25

For example, if people increased savings, it will lead to a fall in national income. The paradox of thrift is a concept that if many individuals decide to increase their current saving, it can lead to a fall in general consumption

Through the mulplier effect, it will cause a fall in national income and a low level of income will lead to an increase in MPC and APC. This will entuallu leads to a decrease in savings

In a recession, we often see this 'paradox of thrift'. In 2020, the economic shutdown lead to an unprecedented rise in savings. Partly because people are very nervous about the future economy but also because opportunities to spend are severely limited.

Front 26

Why does investment occur frequently

Back 26

This is due capital consumption. This is the loss of capital equipment due to depreciation. Depreciation can occur due to the machines wearing out.

Capital consumption needs to be deducted from GDP of a country and from the profits of a firm. This is because capital consumption reflects the amount of investment necessary to replace worn out material and as such does not indicate an increase in living standards.