Term
| What is Keynesian economics based primarily around? |
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Definition
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Term
| What are the key differences between the Classical and Keynesian view of economics? |
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Definition
1) Say's Law: may not hold in money economy; more output than demanded
2) Savings: savings dependent on interest rate; ie more interest rate more saved
3) Investment: pessimistic expectations; lower interest rate makes no investment
4) Prices/Wages: May be inflexible downward. |
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Term
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Definition
| These models hold that it is sometimes in the best interest of business firms to pay their employees higher-than-equilibrium wage rates. |
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Term
| What is the Keynesian perspective on wage rates? |
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Definition
| They are more flexible up than down. It can even be inflexible to decrease them. |
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Term
| What does Keynesian economics focus on? |
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Definition
| The short run; Keynesian economists believe that the long run could happen too much later to count it |
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Term
| What is the consumption function? |
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Definition
| C = C0 + (MPC)(Yd); the direct relationship between consumption and disposable income |
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Term
| Marginal Propensity to Consume (MPC) |
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Definition
| The ratio of the change in consumption to the change in disposable income. MPC = [change in consumption]/[change in disposable income (Yd)] |
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Term
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Definition
| The part of consumption that is independent of disposable income. |
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Term
| What is the consumption function in words? |
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Definition
| Consumption = Autonomous Consumption + (Marginal propensity to consume)(Disposable income) |
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Term
| What can cause an increase in consumption? |
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Definition
| Raise autonomous consumption, raise disposable income, or raise the MPC |
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Term
| Marginal Propensity to Save (MPS) |
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Definition
| The ratio of the change in saving to the change in disposable income. MPS = [change in savings]/[change in disposable income (Yd)] |
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Term
| What is the savings function in words? |
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Definition
| Saving = Disposable income - [Consumption + (Marginal propensity to consume)(Disposable income)] |
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Term
| What is the savings function? |
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Definition
| S = Yd - [C0 - (MPC)(Yd)] |
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Term
| What is the formula for the relation between MPC and MPS? |
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Definition
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Term
| The formula for the multiplier (m)? |
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Definition
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Term
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Definition
| The number that is multiplied by the change in autonomous spending to obtain the overall change in total spending. If the economy is operating below Natural Real GDP, then the multiplier turns out to be the number that is multiplied by the change in autonomous spending to obtain the change in Real GDP. |
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Term
| Change in total spending formula? |
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Definition
| Multiplier times change in autonomous spending (m * [change in C0]) |
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Term
| How does the aggregate supply curve look in Keynesian economics? |
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Definition
| It is horizontal until it reaches the natural Real GDP, because the simply Keynesian model assumes that the price level is constant until QN is reached. |
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Term
| What did Keynes believe about private sectors in regards to aggregate demand? |
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Definition
| He felt that they could not always move the AD curve. |
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Term
| When does Keynes believe the government should intervene in a recessionary gap? |
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Definition
| When the private sectors cannot self-regulate the economy to the natural Real GDP point. |
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Term
| Summarize the simple Keynesian model. |
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Definition
1) Price level is constant until Qn is reached.
2) AD curve shifts if there are changes in C I or G
3) Economy can be in recession and equilibrium at same time
4) Private sector cannot always get economy out of recession (cannot increase C/I enough)
5) Government has a role to play in economy in a situation where the PI cannot affect AD enough to get out of recession |
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Term
| What are three terms for the Keynesian model? |
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Definition
| Keynesian cross, income expenditure, and total expenditure-total production. |
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Term
| What are generally constant when deriving a total expenditures curve? |
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Definition
| Investment and Government purchases |
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Term
| What can shift the total expenditures curve? |
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Definition
| Consumption, investments, or government spending |
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Term
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Definition
| Overproduction; too much inventory. To balance: Causes a cut back in the production of quantity of goods. Causes Real GDP to fall; makes Real GDP closer to amount 3 sectors are willing and able to buy; ultimately TE = TP |
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Term
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Definition
| Underproduction; increase their production. Causes real GDP to rise; in process bringing Real GDP that 3 sectors are willing and able to buy. Ultimately TP = TE |
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Term
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Definition
| Inventories are at optimum levels. |
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Term
| In the portrayal of TE and TP, summarize the simple Keynesian model. |
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Definition
1) Price level is constant until Qn is reached.
2) TE curve shifts if change in C I or G
3) Economy can be in recession & equilibrium
4) Private sector cannot always get economy out of recession
5) Government has role to play in economy |
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Term
| The federal budget is composed of what two parts? |
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Definition
| Government expenditures and taxes |
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Term
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Definition
| An income tax system in which one's tax rate rises as one's taxable income rises (up to some point) |
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Term
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Definition
| An income tax system in which a person's tax rate is the same no matter what his or her taxable income is |
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Term
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Definition
| An income tax system in which a person's tax rate declines as his or her taxable income rises. |
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Term
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Definition
| Government expenditures > tax revenues |
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Term
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Definition
| Tax revenues > government expenditures |
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Term
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Definition
| Tax revenues = government expenditures |
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Term
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Definition
| The part of the budget deficit that would exist even if the economy were operating at full employment |
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Term
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Definition
| The part of the budget deficit that would exist even if the economy were operating at full employment |
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Term
| Public debt (national/federal debt) |
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Definition
| The total amount that the federal government owes its creditors |
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Term
| Total budget deficit formula? |
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Definition
| Structural deficit + cyclical deficit |
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Term
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Definition
| Changes in government expenditures and/or taxes to achieve economic goals, such as low unemployment, stable prices, and economic growth |
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Term
| Expansionary Fiscal Policy |
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Definition
| Increases in government expenditures and/or decreases in taxes to achieve particular economic goals |
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Term
| Contractionary Fiscal Policy |
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Definition
| Decreases in government expenditures and/or increases in taxes to achieve economic goals |
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Term
| Discretionary Fiscal Policy |
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Definition
| Deliberate changes of government expenditures and/or taxes to achieve economic goals |
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Term
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Definition
| Changes in government expenditures and/or taxes that occur automatically without (additional) congressional action. |
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Term
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Definition
| The decrease in private expenditures that occurs as a consequence of increased government spending or the financing needs of a budget deficit |
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Term
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Definition
| A decrease in one or more components of private spending that completely offsets the increase in government spending |
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Term
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Definition
| The decrease in one or more components of private spending that only partially offsets the increase in government spending |
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Term
| What is an example of a direct effect of crowding out? |
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Definition
| The government spends more on public libraries, and individuals buy fewer books at bookstores. |
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Term
| What is an example of an indirect effect of crowding out? |
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Definition
| The government spends more on social programs and defense without increasing taxes; size of deficit increases. Causes more borrowing funds to finance the debt, which in turn causes interest rates to rise, which in turn then causes investment to drop. |
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Term
| What is lag, and what are five types of lag? |
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Definition
LAGGGGGGGGG; data lag: policy makers are not aware of changes in economy as soon as they happen
wait-and-see lag: policy makers dont enact immediately in hopes it changes
legislative lag: Congress/president take a while to put an act into place
transmission lag: Fiscal policy takes a while to go into affect
effectiveness lag: takes time to effect economy after a policy is in place |
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Term
| Belief in supply-side fiscal policy? |
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Definition
| Tax rates affect supply and demand |
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Term
| Marginal tax rate formula? |
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Definition
| [change in tax payment]/[change in taxable income] |
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Term
| Marginal (Income) Tax Rate |
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Definition
| The change in a person's tax payment divided by the change in his or her taxable income. |
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Term
| What is the Laffer curve? |
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Definition
| The belief that tax rates are best at a level other than the highest or the lowest; ie 0-100 50 may be the best tax rate due to consumption |
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Term
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Definition
| Tax base * (average) Tax rate |
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Term
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Definition
| The curve, named after Arthur Laffer, that shows the relationship between tax rates and tax revenues. According to the Laffer curve, as tax rates rise from zero, tax revenues rise, reach a maximum at some point, and then fall with further increases in tax rates. |
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Term
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Definition
| In terms of income taxes, the total amount of taxable income. |
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