#econs-example

Economic Growth averaged -5% from 1929 - 1931, and unemployment in some countries exceeded 30%. This was before Keynesian Economics, when completely free capitalism was the main focus, Non-keynesian Economics;

• Market set prices
• Market set wages
• No Government Intervention
• Believed Government spending should match revenue collected. No matter the state of the economy.

• Keynes believed Aggregate Demand determined economic activity.
• He proposed the use of Fiscal Policy and Monetary Policy to mitigate adverse effects of downturns in aggregate demand.
• Keynes ideas popularised during 1940s to 1950s. It was known as the ”Keynesian Revolution”
• Keynes ideas make the size & impact of the Business Cycles phases smaller than prior.

The Consumption Function §

Where; = Consumption = Marginal Propensity to Consume Y = Income It is a function, like in maths e.g. is the same. When plotted; Spending is on the vertical axis. Disposible Income is on the horizontal Axis The goes out from the bottem left to the top right, equal distance from either side. Thus showing where Disposible Income is equal to Spending. Or where . (Planned Expenditure is just the spending i assume). Where consumption intersects the line, the economy is in equilibrium, spending in the economy is stable. Income, Output, and spending are in balance. This is also called the ”breakeven” point.

• If Income is greater than equilibrium, income exceeds consumption and thus consumers save some of their income, meaning they longer ”breakeven” in terms of savings, and savings is positive. e.g. an economy where everyone earns 10 units of income, and lives off only 1 unit. , so they save the rest (9 units). This would not last long.
• If Income is below equilibrium consumption exceeds income, and thus consumers must take out money from their savings to cover their consumption, so they no longer ”breakeven” and savings is negative this is referred to as “Dis-savings”. e.g. An economy where no income is 0, but everyone takes out and consumes 1 unit to survive: here the equation says savings is -1 since they make no money but spend money

is Autonomous Consumption, it is the y-intercept where Income = 0, but consumption remains. is the Marginal Propensity to Consume, it is the ”rate consumption changes when Income rises”, and represents the slope / gradient of the consumption function. in other words, is a percentage 0%-100%, that represents the proportion of income people will spend on consumption rather than savings. if b = 60%, for every $1, 60% will be consumed, 40% will be saved.

• b is equal to MPC in the consumption function,
• the opposite, MPS, Marginal Propensity to save is the portion of MPC not consumed.

Introducing the Financial Sector §

The Vertical-Axis uses ”Aggregate Expenditure” unlike ”Total Spending” on the consumption function, though this doesnt really change anything This model assumes where; I = Investment

The model assumes Investment is constant and ignores changes to due Investment Influences.

The Full Aggregate Expenditure Model §

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