Chapters 11 and 12
Quiz yourself by thinking what should be in
each of the black spaces below before clicking
on it to display the answer.
Help!
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| Aggregate Expenditure Model (AEM) | Consumption + Investment
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| Before Aggregate Expenditure Model | Laissez-Faire System (minimum government intervention)
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| How Market took care of problem before AEM? | Recession, lowered GDP, made unemployment go up, then Average price level dropped, wages dropped, demand for labor went up, unemployment went down, GDP went up
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| John Maynard Keynes | The General theory of employment, interest and money
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| Two arguments Keynes had | 1) Prices are inflexible downwards = prices don't easily come down
2) Savings do not always turn into investments
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| Say's Law | "Supply will create it's own demand"
Creates income (wages, rent, capital)
Income --> demand
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| Assumptions: | 1) Closed economy = no exports or imports
2) No government intervention = no role in economy
3) Savings = household savings
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| Equilibrium GDP = | Real GDP = Aggregate Expenditure
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| Multiplier | Change in Real GDP(output or input) / Change in Investment
Or
1 / 1-MPC
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| Leakage |
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| Injection | Investments or the purchase of capital goods
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| Inflationary expenditure gap | the amount by which an economy's aggregate expenditures at the full employment GDP exceed those just necessary to achieve full employment GDP
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| Recessionary Expenditure Gap | the amount by which aggregate expenditures at the full employment GDP falls short of those required to achieve the full employment GDP
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| Potential GDP = | Full employment
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| Foreign GDP | 1) Foreign GDP or Prosperity abroad--> Foreign GDP ^ Income ^ Demand ^ Imports ^Demand for goods ^--> Our exports ^ Net Exports ^
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| Exchange Rates | $ becomes stronger or appreciated = Net Exports ^
$ becomes weaker or depreciated = Net Exports down
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| Tariffs | Tax on imports-->increase the price of imports-->Quantity demanded down-->Imports down-->Net Exports ^
(can be good or bad)
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| Devaluations | Decreasing the value or your currency, government decreases currency
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| Aggregate Demand (AD) = | Aggregate Expenditure ( C+I+G+NE)
Price level ^ Demand down
Price level down Demand ^
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| Why AD has negative slope | 1 Real balance effect (wealth effect)>Price ^Wealth down AD down
2 Interest Rate Effect>Price^Demand for money^ Interest Rate^ Investment down, Consumption down, AD down
3Foreign Price Effect>Prices ^Exports down, Net Exports down, Imports ^,AD down
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