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The Keynesian Modell
The Keynesian Modell
Great Depression
From 1929-1941, the United States (and the world) was in a huge economic depression, in the U.S. the official unemployment rate was 25%. This doesnt count the millions living in the Hoovervilles the homeless camps named for the President. Not until the U.S. entered WWII did the economy recover.
C/ Yd + S/ Yd = 1 and mps = 1 b
C/ Yd + S/ Yd = 1 and mps = 1 b
Proof:
C/ Yd + S/ Yd = 1 and mps = 1 b
Proof: If Yd = C + S, then
C/ Yd + S/ Yd = 1 and mps = 1 b
Proof: If Yd = C + S, then Any change in Yd must resolve itself some part of a change in C and some part a change in S.
C/ Yd + S/ Yd = 1 and mps = 1 b
Proof: If Yd = C + S, then Any change in Yd must resolve itself some part of a change in C and some part a change in S. So, Yd = C + S
C/ Yd + S/ Yd = 1 and mps = 1 b
Proof: If Yd = C + S, then Any change in Yd must resolve itself some part of a change in C and some part a change in S. So, Yd = C + S Divide both sides by Yd, and we get:
C/ Yd + S/ Yd = 1 and mps = 1 b
Proof: If Yd = C + S, then Any change in Yd must resolve itself some part of a change in C and some part a change in S. So, Yd = C + S Divide both sides by Yd, and we get: 1 = mpc + mps (from 1 = mpc + mps)
autonomous consumption
But is present income the only determinant of present consumption?
autonomous consumption
But is present income the only determinant of present consumption? No. What else?
autonomous consumption
But is present income the only determinant of present consumption? No. What else: accumulated past savings
autonomous consumption
But is present income the only determinant of present consumption? No. What else: accumulated past savings access to credit
autonomous consumption
But is present income the only determinant of present consumption? No. What else: accumulated past savings access to credit expectations of future income
autonomous consumption
But is present income the only determinant of present consumption? No. What else: accumulated past savings access to credit expectations of future income social standards etc.
45 Degree Line
exp.
15 10 5 45
45 0 5 10 15
Keynesian Model
45 Expenditure
C<Y
C = a + bY
a+I
C=Y
a I
C>Y
0
-a
Y1
Yf
C = a + bYd
C = a + bYd
What is the slope of the consumption function?
C = a + bYd
What is the slope of the consumption function? b (b = mpc = marginal propensity to consume = C/ Yd = rise/run = slope)
C = a + bYd
What is the slope of the consumption function? b (b = mpc = marginal propensity to consume = C/ Yd = rise/run = slope) What is the y intercept of the C function?
C = a + bYd
What is the slope of the consumption function? b (b = mpc = marginal propensity to consume = C/ Yd = rise/run = slope) What is the y intercept of the C function? a (a = autonomous consumption = y intercept)
savings function
S = -a + (1 - b) Yd
savings function
S = -a + (1 - b) Yd What is the y intercept of the savings function?
savings function
S = -a + (1 - b) Yd What is the y intercept of the savings function? a (= autonomous savings)
savings function
S = -a + (1 - b) Yd What is the y intercept of the savings function? a (= autonomous savings) What is the slope of the savings function?
savings function
S = -a + (1 - b) Yd What is the y intercept of the savings function? a (= autonomous savings) What is the slope of the savings function? (1 b) ( = mps = marginal propensity to save = S/ Yd = rise/run = slope)
Keynesian Model
45 Expenditure
C<Y
C = a + bY
a+I
C=Y
a I
S=0
S = - a + (1 b) Y
C>Y
S>0
S< 0
0
-a
Y1
Yf
Dissaving
savings function
When the savings function is below the xaxis savings is negative, when the savings function is above the x-axis savings is positive and when the savings function intersects the x-axis savings = 0.
Keynesian Model
45 Expenditure
C<Y
C = a + bY
a+I
C=Y
a I
S=0
S = - a + (1 b) Y
C>Y
S>0
S< 0
0
-a
Y1
Yf
Dissaving
Keynesian Model
45 Expenditure
C<Y
C = a + bY
a+I
C=Y
a I
S=0
S = - a + (1 b) Y
C>Y
S>0
S< 0
0
-a
Y1
Yf
Dissaving
autonomous investment
In Keynes, investment is determined by a number of factors, most importantly investor expectations of future conditions. The important point here, though, is that investment, unlike consumption and savings, is NOT a function of income. It is autonomous in the same sense as autonomous consumption. Neither is it a simple function of interest rates, as in the neoclassical model. The investment function will be horizontal.
Keynesian Model
45 Expenditure
I=I
I
0 Y1 Y* Yf
Keynesian Model
45 Expenditure
AS = C + I
C = a + bY
a+I
S = - a + (1 b) Y
a I
0
-a
Y1
Y*
Yf
Keynesian Model
45 Expenditure
AS = C + I
C = a + bY
a+I
S = - a + (1 b) Y
a I
0
-a
Y1
Y*
Yf