Keynesian Economics and the IS-LM Model

These flashcards cover key concepts from Keynesian economics and the IS-LM model, focusing on their definitions, implications, and relationships in economic theory.

The postulates of the classical theory are applicable to __ only, according to Keynes.

a special case

The most painful economic fluctuation in world history is __.

the Great Depression of the 1930s

In 1933, __ of the U.S. labor force was unemployed during the Great Depression.

one-fourth

Real GDP was __ below its 1929 level at the worst year of the Depression.

30 percent

Keynes revolutionized economics with his book titled __.

The General Theory of Employment, Interest and Money

Keynes argued that low income and high unemployment result from __ aggregate demand during economic downturns.

insufficient

According to Keynes, classical theory assumes that national income is determined by __ alone.

aggregate supply

The IS-LM model helps to analyze fluctuations in __.

national income

In the long run, __ are flexible and aggregate supply determines income.

prices

In the short run, __ prices are sticky, causing changes in aggregate demand to influence income.

fixed

Government can influence aggregate demand with both and policy.

monetary, fiscal

The IS curve represents the interaction of and in the market for goods and services.

investment, savings

The LM curve represents the supply and demand for __.

money

The intersection of the IS and LM curves determines and .

the interest rate, national income

An increase in government spending shifts the IS curve __.

to the right

The __ multiplier indicates how much income rises in response to a $1 increase in government purchases.

government-purchases

A decrease in taxes raises __, increasing planned expenditure.

disposable income

The tax multiplier is defined as the amount income changes in response to a __ change in taxes.

$1

Keynesian economics emphasizes the role of __ in determining national income.

aggregate demand

The __ cross demonstrates how actual expenditure equals planned expenditure when the economy is in equilibrium.

Keynesian

A decrease in taxes also has a multiplied effect on income, leading to a rise in __.

consumption

The IS curve slopes downward because an increase in the __ reduces planned investment.

interest rate

According to the theory of liquidity preference, the interest rate adjusts to balance the supply and __ of money.

demand

When the money supply decreases, the interest rate __.

increases

The LM curve slopes __ because higher income raises the demand for real money balances.

upward

An increase in the money supply results in __ interest rates.

lower

The Keynesian cross shows that the __ propensity to consume influences planned expenditure.

marginal

Fiscal policy is often evaluated in terms of its __ effects on income.

multiplied

The goods market equilibrium is represented by the __ curve.

IS

The money market equilibrium is represented by the __ curve.

LM

In the Keynesian cross, equilibrium income is reached when planned expenditure equals __ expenditure.

actual

A higher interest rate causes planned investment to __, lowering national income.

decrease

If aggregate demand shifts, the economy responds by reaching a new __ level.

equilibrium

The __ theory explains how the interest rate is determined in the short run.

theory of liquidity preference

In the Keynesian model, if government purchases increase, planned expenditure shifts __.

upward

The feedback loop between consumption and income in the Keynesian model indicates a __ effect.

multiplied

Keynes believed the main problem during recessions is __ spending.

inadequate

If firms experience higher production than expected, they will see a rise in __.

inventories

Keynesian crosses illustrate that economies can reach a __ without full employment.

equilibrium

The marginal propensity to consume (MPC) determines how much planned expenditure increases when income __.

rises

An increase in tax rates can result in a __ in planned expenditure.

decrease

The demand curve for real money balances slopes __ because higher interest rates lower the quantity demanded.

downward

Real money balances are an indicator of liquidity, calculated as __ divided by the price level.

money supply (M)