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After reading Chapter 12, you should be able to:
- List and explain the four simplifying assumptions of the Keynesian Model and explain the implications of these assumptions.
- Define and explain the relationship between the following terms: a) consumption, b) consumption goods, c) saving, d) disposable income, e) investment, f) capital goods, g) stocks, and h) flows.
- Explain what the Keynesian Consumption Function is, and they should be able graph it on a graph with a 45-degree reference line and be able to interpret such a graph.
- Define, distinguish between, and explain the relationship between the following concepts related to the Keynesian Consumption Function: a) Autonomous Consumption, b) Average Propensity to Consume, c) Average Propensity to Save, d) Marginal Propensity to Consume, and e) Marginal Propensity to Save.
- Explain what the Keynesian Planned Investment Function is and how planned investment is determined by the function. Students should also understand how investment spending is included in the Keynesian 45-degree graph with consumption spending, See Figure 12-4.
- Explain how equilibrium is determined in a simple Keynesian model that includes only consumption spending and investment spending in the context of the 45-degree reference line graph and the Saving and Investment graph. In reference to both these graphs, students should also be able to distinguish between Planned and Actual Investment and explain how unplanned changes in business inventories affect the national economy.
- Explain and illustrate (using the 45-degree reference line graph) how the national economy comes to an equilibrium when Government Spending (G) and Net Exports (X=exports – imports) are added to Consumption Spending and Investment Spending. Students should understand in this context what it means to say that Investment Spending, Government Spending, and Net Exports are autonomous from Real GDP.
- Explain what the Multiplier
Effect is and how it works in the context of Table 12-3 and Figure C-1.
- State the two different
formulas for the multiplier (First: Multiplier = 1/(1-MPC) =
1/MPS; Second: Multiplier = (Ultimate change in equilibrium real
GDP)/(change in autonomous spending)) and be able to solve
simple algebraic problems involving these formulas.
- Explain how the Multiplier
works when we assume Price Level is not fixed (SRAS slopes
upward) in the context of Figure 12-7, AND the relationship
between Total Planned Expenditure (C+I+G+X) and Aggregate Demand
in the context of Figure 12-8.
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