err2p2017 Print Preview ‘Chapter 10: Keynesian Macroeconomics and Economic Instability: A Critique ofthe Selt Regulating Economy Chapter Review Book Title: Economies Printed By: Kaye Alyssa Enriquez (kaye.enriquez33@gmail.com) © 2014, 2011 South-Western, Cengage Learning Chapter Review Chapter Summary + Keynes on Wage Rates and Prices + Keynes believed that wage rates and prices may be inflexible downward. He said that employees and labor unions will resist ‘employer's wage cuts and that, because of anticompetitive or monopolistic elements in the economy, prices will not fall. + Keynes on Say's Law + Keynes did not agree that Say's law would necessarily hold in a money ‘economy. He thought it was possible for consumption to fall (for saving to increase) by more than investment increased. Consequently, a decrease in consumption (or increase in saving) could lower total ‘expenditures and aggregate demand in the economy. + Consumption Function + Keynes made three points about consumption and disposable income: (1) Consumption depends on disposable income, (2) Consumption and disposable income move in the same direction. (3) As disposable income changes, consumption changes by less. These three ideas are incorporated into the consumption function, C = C ot (MPC x Y,,), where C 4 is autonomous consumption, MPC is the marginal propensity to consume, and Y,, is disposable income. + The Multiplier + Achange in autonomous spending will bring about a multiple change in total spending. The overall change in spending is equal to the multiplier [1/(1 - MPC)] times the change in autonomous spending hitptng.congage.convstatcinb/utindex htmi¢nbld=17407&nbNodeld=24458808o1S8N=9781133600633#lKparentio=2445908 18err2p2017 Print Preview the AD-AS Framework + The Simple Keynesian Model + Changes in consumption, investment, and government purchases will change aggregate demand. + Arise in C, /, or G will shift the AD curve to the right A decrease in C, /, or G will shift the AD curve to the left. ‘The aggregate supply curve in the simple Keynesian model has both a horizontal section and a vertical section. The kink between the two sections is at the Natural Real GDP level. If aggregate demand changes. in the horizontal section of the curve (when the economy is operating below Natural Real GDP), Real GDP changes, but not the price level. If aggregate demand changes in the vertical section of the curve (when the economy is operating at Natural Real GDP), the price level changes, but not Real GDP. + The Simple Keynesian Model in the TE-TP Framework * Changes in consumption, investment, and government purchases will change total expenditures. * Arise in C, |, or G will shift the TE curve upward. + Adecrease in C, |, or G will shift the TE curve downward. * If total expenditures (TE) equal total production (TP), the economy is in ‘equilibrium. If TE < TP, the economy is in disequilibrium and inventories will unexpectedly rise, signaling firms to cut back produetion. If TE > TP, the economy is in disequilibrium and inventories will unexpectedly fall, signaling firms to increase production. * Equilibrium occurs where TE = TP. The equilibrium level of Real GDP may be less than the Natural Real GDP level, and the economy may be stuck at this lower level of Real GDP, + AKeynesian Theme + Keynes proposed that the economy could reach its equilibrium position with Real GDP below Natural Real GDP; that is, the economy could be in equilibrium and in a recessionary gap too. Furthermore, he argued that the economy may not be able to get out of a recessionary gap by itself. Government may need to play a management role in the ‘economy. hitptng.congage.convstatcinb/utindex htmi¢nbld=17407&nbNodeld=24458808o1S8N=9781133600633#lKparentio=2445908 218err2p2017 Print Preview ‘Chapter 10: Keynesian Macroeconomics and Economic Instability: A Critique ofthe Selt Regulating Economy Chapter Review Book Tile: Economics Printed By: Kaye Alyssa Enriquez (kaye.enriquez33@gmail.com) © 2014, 2011 South-Westem, Cengage Learning (© 2017 Cengage Learning Inc. Al rights reserved. No part ofthis work may by reproduced or used in any form or by any means - ‘graphic, electronic, or mechanical, or in any other manner - without the written permission of the copyright holder. hntptng.congage.comvstatcnbuindex html bld=174078nbNodel 24458808 ISBN-9781139600633#l&parentlo=2445905 ais