Keynesian Model

Flashcards on the Keynesian Model

Keynesian Model

A simple macroeconomic model of an economy which consists of households and firms only, focusing on consumption and investment spending, and their effects on output and inflation.

Equilibrium

A situation in which there is no tendency to change; it occurs when none of the participants have any incentive to change their behavior.

Say's Law

States that supply creates its own demand (Y creates A).

Keynes's View

Aggregate spending or demand (A) determines the level of economic activity (Y).

Exogenous Variables

Values (prices, wages, interest rates, money stock) are determined outside the model.

Consumption Function

The relationship between a household’s consumption and income.

Autonomous Consumption

Part of consumption which is independent of the level of income, financed from sources other than income (e.g., savings or credit).

Induced Consumption Spending

Spending that is induced or encouraged based on your level of income.

Marginal Propensity to Consume (MPC)

The slope of the consumption function; indicates the portion of each additional rand a consumer earns (income) that will be spent on consumption.

Investment Spending

Spending by firms which is the most volatile component of aggregate demand and is negatively related to interest rates and is not a function of income.

Multiplier

The ratio between the eventual change in income and the initial change in investment, depends on the MPC, and is the mechanism identified for increasing national income in instances greater than the initial investment spending. (1/1-c)