TAILIEUCHUNG - Lecture Economics - Chapter 19: The Keynesian model in action

After studying this chapter you will be able to understand: Why does Keynes argue that the government should adopt active policies, rather than allowing the price system to prevail? Can the Keynesian Model explain an ice cream war? Why did Keynes reject the classical theory that “supply creates its own demand”?. | Chapter 19 The Keynesian Model in Action Key Concepts Summary Practice Quiz Internet Exercises ©2000 South-Western College Publishing * In this chapter, you will learn to solve these economic puzzles: Why did Keynes reject the classical theory that “supply creates its own demand”? Why does Keynes argue that the government should adopt active policies, rather than allowing the price system to prevail? Can the Keynesian Model explain an ice cream war? * What is the purpose of this chapter? To complete the Keynesian model by adding the government and the foreign sector to our analysis * What percent of GDP is Government and the Foreign sector? About 17% of GDP * Why is Government spending considered an Autonomous Expenditure? Government spending is primarily the result of a political decision made independent of the level of national output * 1 2 3 4 5 6 7 8 9 Autonomous Government Spending 10 Real GDP Trillions of $ per year Government Spending Real Government spending Trillions of $ per year Government Spending G1 G2 * Why is Net Exports assumed to be Negative? For many years our spending for imports has exceeded the value of exports we have sold to foreigners. * 1 2 3 4 5 6 7 8 9 Autonomous Net Exports 10 Real GDP Trillions of $ per year Positive Net Exports Real Net Exports Trillions of $ per year Negative Net Exports (X-M)2 (X-M)1 Zero Net Exports (X-M) * What does the term Equilibrium mean? In the Keynesian model, the equilibrium is the point toward which the economy tends * In the Keynesian Model, where is the Equilibrium level of GDP? It is where the total value of goods and services produced is precisely equal to the total spending for these goods and services * What can pull Aggregate Expenditures higher or lower in Keynesian economics? Aggregate expenditures C + I + G + (X-M) * What affect do Aggregate Expenditures have on the .

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