before 1930 classical economists dominated; - they bleieve that the economy neds no government intervention

in 1930 labour became incredibly cheap.

Keyn formed keynesian economics where he thought about it differently

John meynair kaynes thought;

• the most important thing to drive economic activity is consumption
• If Consumption is low we must do something to improve it
• He thoguht the government should spend in consumers place
• (USA ”new deal”) was when government started spending lots of money, this made them employ people.

Keynesian economics say;

• if economic activity is low
• govenrments shoud spend money
• to stimulate output, employment, income etc.

He believed consumption is the most important determinant of economic activity. Today Consumption is 55% of all economic activity.

GRIPE - Investment Influences

CF + PL §

When adding Planned investment (constant) is added to the Consumpiton function, we simply increase it by the value of Planned Investment

Planned Investment is equal to the value of Real Income (checkk that) ] Adding Planned Investment to the Consumption function means the break even point is futher along, this is because we cant save until we have broken even for the autonomous investment spending.

Questions Consumption F + Investment §

• What is the initial equilibrium level of spending, output and income in the economy? ~400 on the Real GDP axis, going straight up, this is the interesection. this isntersection 45 degree line

• What happens to the level of planned investment as Real GDP increases? Autonomous planned investment does not rise i stays constant throughout.

• By how much does the level of autonomous spending rise when the planned investment is added to the consumption function? Autonomous spending rises by the amount of Planned Investment, since it is constant it just increases by this amont overall (in this case 50)

• What is the new equilibrium level of spending, output and income in the economy? it is at point “D”, this is the intersection of the 45 dgree line (all equilibriums) and the new consumption function line.

Where is the new breakeven point in this economy? Where savings is equal to planned investment

• Explain how the initial change in autonomous spending would have flowed through the economy until this new equilibrium was reached? We would see the economy refocus back into equilibrium by firms inventory decreases, causing an increase in production, > increase in employment > increase in income ^ increase in Consumption until we reach equilibrium4.

• What do you notice about the change in autonomous spending compared to the final change in income? The initial increase in aggregate expenditure (50B) generated a increase in a change of income, output, and, etc of 350B.

Questions §

1.On the AE model, show a point where the level of output in the economy is greater than the level of spending. anywhere above the equilibrium 2.Explain the process by which the economy would return to macroeconomic equilibrium. Increase in inventory as we producem ore than necessary —> math time bye 3.At would point would the economy return back to macroeconomic equilibrium?

4.Would this most likely be associated with an increase or a decrease in business activity? #review

Questions §

1. ~55
2. ~115 Aggregate Expenditure (Y Axis), ~115 (X Axis),
3. Firm inventory would increase, which would cause an idecrease in producton, which would mean resourceu se of labour decreases, which means income falls whih means consumption falls.
4. A decrease since there is less uilisation of labour and spending, since ocnsumption accounts for 60%.

• Equilibrium is not necessarily a good place for the economy to be, when in equilibrium there is little motivation for change, e.g. if we were stuck in equilibrium at low output and income.

Questions §

Article

• By how much has annual inflation fallen between April and May of 2023? Fell to 5.6 (may) from 6.8 (April) 1.2% fall
• Identify the key reason why inflation fell during this period?
  • Fuel Prices came dwon
• What impact may this have on the official cash rate set by the RBA in July? 70% chance that RBA will not shift ratesdue to concerns about CPI, excluding volatile items
• Explain why economists predict that there are likely to be further rate rises this year.