Spending and Output in the Short Run

These flashcards cover key concepts from the lecture on spending and output in the short run, focusing on the Keynesian model, planned aggregate expenditure, fiscal policy, and economic stabilization.

What is the main assumption of the basic Keynesian model regarding production and consumption decisions?

It assumes that economies can be in a recessionary gap where aggregate spending is too low for full employment.

What does planned aggregate expenditure (PAE) consist of?

PAE consists of consumption (C), investment (I), government purchases (G), and net exports (NX).

In the basic Keynesian model, how does a change in planned aggregate expenditure affect short-run equilibrium output?

A change in planned aggregate expenditure can cause a change in short-run equilibrium output, which is related to the income-expenditure multiplier.

What role does fiscal policy play according to the basic Keynesian model?

Fiscal policy is seen as a useful tool for stabilizing the economy by influencing aggregate spending.

Who is credited with revolutionizing economic thought and public policy during the Great Depression?

John Maynard Keynes.

How does the consumption function relate planned consumption to disposable income?

The consumption function is expressed as C = C + (mpc) (Y – T), where mpc is the marginal propensity to consume.

What does the income-expenditure multiplier indicate?

It shows the effect of a one-unit increase in autonomous expenditure on short-run equilibrium output.

What is a recessionary gap?

A recessionary gap is the difference between potential output and actual output when the economy is underperforming.

What are automatic stabilizers in fiscal policy?

Automatic stabilizers are mechanisms that increase government spending or decrease taxes when real output declines.

What effect does a decrease in the marginal propensity to consume (mpc) have on the multiplier?

A decrease in mpc results in a smaller multiplier effect.