Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal actions by the government to stabilize output along the businesses cycle in any economic stage.
Based this economic theory, the "Keynesian multiplier", first developed by Richard F. Kahn, increases in spending, such as an increase in government outlays, increases total spending by a multiple of that increase. A government could stimulate a great deal of new production if: 1. The people who receive this money then spend most on consumption goods and save the rest. 2. This extra spending allows businesses to hire more people and pay them, which in turn allows a further increase consumer spending.
This process continues. At each step, the increase in spending is smaller than in the previous step, so that the multiplier process tapers off and allows the attainment of equilibrium. This story is modified and moderated if we move beyond a "closed economy" and bring in the role of taxation: the rise in imports and tax payments at each step reduces the amount of induced consumer spending and the size of the multiplier effect. An example of this would be WW2
George
Crowding out is any increase in government spending that leads to a subsequent decrease in private investment If spending financed with tax increase, said increase would reduce private consumption
If not financed with tax increase, interest rates would rise, decreasing private investment
Most serious when an economy is already at full employment
Common in health economics
Assumptions: Higher interest rates will create a higher demand for money
When government needs to finance debt, people will take money from LFM and put it in gov't bonds
Go'vt deficit spending boosts demand for loanable funds b/c they must borrow from the public
Conor:
-Lorenz Curve
-Model used to illustrate Income Distribution
-Y-Axis represents the percentage of all incomes
Halfway up the Y-Axis would represent 50% of all the dollars earned
-X-Axis represents a given number of lowest wage earners
So you could say that the lowest 80% of all the wage earners (people) earn about 50% of all the income ($)
-The further the Lorenz curve is away from the Line of Equality, the less equally the income is distributed: the Gini Coefficient
Michael:
-Gini Coefficient:
-Measure of "how far" away from the equality line the Lorenz Curve is
-Tells howincome is distributed
-Big Gini Coefficient = more uneven distribution
-Purpose: allows for easy comparison of countries' distributions
-Lowest = Denmark = .247
-Highest = Namibia = .7
Weaknesses of the Gini Coefficient:
-2 countries with different distributions have the same Gini value
-Only gives info on total distribution, not rich/poor relationship
-Doesn't reflect poverty of wealth. High Gini Coefficient can have high standard of living in low-income group, or maybe not. Vice versa is also
true.
Jamie
Accelerator Model Overview: The accelerator model is intended to be very similar to multiplier, and, in Keynesian theory, the two are assumed to work together. The accelerator theory of investment basically states that as firms increase their output, the need for greater capital to sustain growth will lead to an increase in desired levels of income.
The accelerator theory of investment does, however, make some large assumptions:
- Assumes that firms’ past output levels form the basis for expectations of future needs for capital, or that investment is assumed to be primarily linked to changes in demand for output rather that to a change in interest rates.
Complete the table for Company A:
Year
Yearly sales
Desired # of Machines
Net Investment
Gross Investment
(Net Inv. + 2)
1
20,000,000
20
0
2
2
20,000,000
20
0
2
3
22,000,000
22
2
4
4
24,000,000
24
5
25,000,000
25
6
25,000,000
25
7
23,000,000
23
-2
0
8
21,000,000
21
9
20,000,000
20
10
20,000,000
20
Now look back at the table:
Calculate percent change in sales (demand) and the percent change in Gross Investment for years 2 and 3. What do you notice?
Compare 3 to 4 and then 4 to 5. What is the change is investment dependent on?
What is happening in years 7 and 8?
How is the accelerator theory useful?
It demonstrates how investment expenditure is related to aggregate demand, but, at the same time, is more volatile, which helps to explain the fluctuations on the business cycle.
It shows us how output must rise as a constant rate for investment to remain the same.
A small decrease in demand can bring investment down rapidly.
Weaknesses:
The theory ignores the fact that firms may increase labor instead of increasing investment in capital. Many businesses operate at excess capacity levels during demand surges. Time-lag issues make it difficult to connect aggregate demand and changes in capital, so the extent to which the theory actually works is unclear.
Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal actions by the government to stabilize output along the businesses cycle in any economic stage.
Based this economic theory, the "Keynesian multiplier", first developed by Richard F. Kahn, increases in spending, such as an increase in government outlays, increases total spending by a multiple of that increase. A government could stimulate a great deal of new production if:
1. The people who receive this money then spend most on consumption goods and save the rest.
2. This extra spending allows businesses to hire more people and pay them, which in turn allows a further increase consumer spending.
This process continues. At each step, the increase in spending is smaller than in the previous step, so that the multiplier process tapers off and allows the attainment of equilibrium. This story is modified and moderated if we move beyond a "closed economy" and bring in the role of taxation: the rise in imports and tax payments at each step reduces the amount of induced consumer spending and the size of the multiplier effect.
An example of this would be WW2
George
Crowding out is any increase in government spending that leads to a subsequent decrease in private investment
If spending financed with tax increase, said increase would reduce private consumption
If not financed with tax increase, interest rates would rise, decreasing private investment
Most serious when an economy is already at full employment
Common in health economics
Assumptions:
Higher interest rates will create a higher demand for money
When government needs to finance debt, people will take money from LFM and put it in gov't bonds
Go'vt deficit spending boosts demand for loanable funds b/c they must borrow from the public
Conor:
-Lorenz Curve
-Model used to illustrate Income Distribution
-Y-Axis represents the percentage of all incomes
Halfway up the Y-Axis would represent 50% of all the dollars earned
-X-Axis represents a given number of lowest wage earners
So you could say that the lowest 80% of all the wage earners (people) earn about 50% of all the income ($)
-The further the Lorenz curve is away from the Line of Equality, the less equally the income is distributed: the Gini Coefficient
Michael:
-Gini Coefficient:
-Measure of "how far" away from the equality line the Lorenz Curve is
-Tells howincome is distributed
-Big Gini Coefficient = more uneven distribution
-Purpose: allows for easy comparison of countries' distributions
-Lowest = Denmark = .247
-Highest = Namibia = .7
Weaknesses of the Gini Coefficient:
-2 countries with different distributions have the same Gini value
-Only gives info on total distribution, not rich/poor relationship
-Doesn't reflect poverty of wealth. High Gini Coefficient can have high standard of living in low-income group, or maybe not. Vice versa is also
true.
Jamie
Accelerator Model
Overview: The accelerator model is intended to be very similar to multiplier, and, in Keynesian theory, the two are assumed to work together. The accelerator theory of investment basically states that as firms increase their output, the need for greater capital to sustain growth will lead to an increase in desired levels of income.
The accelerator theory of investment does, however, make some large assumptions:
- Assumes that firms’ past output levels form the basis for expectations of future needs for capital, or that investment is assumed to be primarily linked to changes in demand for output rather that to a change in interest rates.
Complete the table for Company A:
(Net Inv. + 2)
Now look back at the table:
How is the accelerator theory useful?
Weaknesses:
The theory ignores the fact that firms may increase labor instead of increasing investment in capital. Many businesses operate at excess capacity levels during demand surges. Time-lag issues make it difficult to connect aggregate demand and changes in capital, so the extent to which the theory actually works is unclear.