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Chapter 12 Keynesian Economics: An Expanded View

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I. Understanding aggregate demand (C + I + G + EN )
     A. Consumption and Saving
          1. Average Propensity to Consume (APC) is consumption (C)
              divided by income (Y). 
              a. APC = C/Y
              b. APC decreases as income increases as people can afford to
          2. Marginal Propensity to Consume (MPC) is the change in 
              consumption divided by the change in income. 
              a. MPC decreases as income increases.
              b. This makes sense because when an average is falling, what is 
                  happening on the margin must be less.
                  1) Suppose your test average after one test is 90 and after
                      2 tests its 80.
                  2) Your second test had to be below 80 to pull the average
                      down. Test 2 was a 70 and (90 + 70) / 2 = 80. 
          3. Saving (S) is income minus consumption. S = Y - C
          4. Average Propensity to Save (APS) is saving divided by
              a. APS = S/Y 
              b. If APC drops as income increases, then APS increases as
                  income increases because APC + APS = 1
5. Marginal Propensity to Save is change in saving divided by
              change in income. 
              a. MPS increases as income increases because wealthy people
                  can afford to save a higher percentage of income.
              b. This makes sense because when an average is rising, what is
                  happening on the margin must be higher.


               Other factors affecting consumption and therefore saving
               include wealth
(savings), expectations about personal needs
               and future economic activity, and concerns about consumer,
               business, and government debt.
     B. Investment is business spending on capital goods,
        , and research & development.
          1. The level of investment is a function of expected profit, interest
               rates, and the level of technology required
to maintain a desired
               competitive position.
         2. Investment spending tends to be somewhat volatile.
    C. Government Spending is assumed to be constant. 
    D. Net Exports, exports minus imports, are also assumed to be
         constant for this simplified model.


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Note: Points on a 45-degree line 
equate values on the x and y axes.





The savings decline is not a [problem because developing countries save a substantial amount because unstable political systems mean they need more protection form uncertainty. There precautionary motive is high.
see liquidity-preference

One problem with this simplified assumption is it assumes investment is fixed. The following graph shows that it is not fined.
seekingalpha 5/7/13 
Free Book Summaries- 3 New York Times Bestsellers II. Aggregate Demand and Equilibrium
     A. Equilibrium (E) is where planned and actual AD and AS are equal.
          1. Equilibrium is where all goods produced for sale are sold. 
          2. At points below equilibrium, AD < AS, inventories are building and
              business activity is contracting. This level of economic activity was
              depicted by the horizontal (Keynesian) range of AS explained in the
              previous model.
          3. At points above equilibrium AD > AS, inventories are decreasing and 
              business activity is expanding
              as depicted by the intermediate range and eventually the classical
              range of AS.
          4. Economic activity (Real GDP) will be wherever AD intersects AS. 
              Equilibrium seldom exists as 
              economic activity is usually in one stage or another of the business
     B. If economic activity is not in balance, a dynamic situation exists and
           will continue until equilibrium is reached.
     C. Keynes believed that E could settle at a level of economic activity with
          large amounts of unemployment.
          1. If potential Real GDP is greater than what actual AD yields, a reces-
              sionary gap exists and may persist indefinitely. The solution to this
              unacceptable equilibrium is to increase AD.
          2. If potential Real GDP is less than what actual AD yields, an inflationary
              gap exists and the inflation may persist indefinitely. The solution to this
              unacceptable level of economic activity is to decrease AD.
          3. Inflationary and Recessionary Gaps- ACDC Economics in 60 Seconds
     D. Multiplier Affect (K) is important to determining the change in AD needed
           to reach equilibrium E.
          1. Changes in AD will result in larger changes in NNP as increases are not
               spent and respent.
          2. Decreases in AD have a similar but opposite affect.
          3. K = 1/MPS = 1?(1-MPC) Note: As MPS increases, K decreases.
          4. A MPS is 20%, Multiplier is 5 as 1/20% = 1/(1/5) = 1X 5 = 5 
          5. Fiscal policy and the multiplier... is an 9 minute video from youtube








May 10, 2013

The Multiplier in Action

The impact of contractionary fiscal policies,
NY Times, based on Moody's Analytics estimates. see .econbrowser





III. Fine Tuning Economic Activity
      A. In chapter 14 we investigate how government taxing and spending
           is used to affect AD and AS and affect the business cycle.
      B. In chapter 15 we investigate how  the Federal Reserve uses monetary
           policy to affect interest rates, AD and AS.
      C. The goal is to maximize growth while minimizing the inflationary
           and deflationary gaps.
      D. fine-tuning is difficult
      E. Seeking Alpha blog on Paul Volcker 
          and recent attempt to fine tuning U.S. Economy

View Macroeconomic Phenomena in the AD/AS Model  
by Dennis Kaufman of the University of Wisconsin-Parkside.

Wikipedia on Keynesian_economics 


Free Book Summaries- 3 New York Times Bestsellers IV. Multiplier
       A. When determining the required change in AD needed to achieve E, the Multiplier (K) concept must
            be considered. 
       B. This concept states that a change in AD will result in a larger change in Real GDP as these changes
            multiply (are spent and re-spent or not spent and re-not spent) throughout the economy. 
       C. Saving will act as a leakage eventually stopping the change.
       D. Suppose more is spent on investment and people receive this as income.
           1. People receiving the income spend some (MPC) and save some (MPS)
           2. A second group receives  the  spending of the first group as income and they also spend
               some (MPC) and save some (MPS).
           3. The process continues until savings eventually stops the progression. 
       E. Calculating multiplier (K), the multiple by which GDP will increase given some increase in AD.
           1. K = 1 / MPS = 1 /(1 - MPC)
           2. As MPS increases,  K decreases 
           3. If MPS = 20% then 1/MPS = 1/.2 = 5 
           4. An increase of $100 billion in investment will result in 5($100) = $500 billion in new national
           5.  K = change in Real GDP / change in AD = 500/100 = 5 
           6. Some unpleasant Keynesian arithmetic Dank Rodrik
           7. Multiplier Interactive practice problems from reff economics
      F. Multiplier and Accelerator Effects from tutor2you          
G. Accelerator/multiplier theories from The History of Economic Thought
. Fed infrastructure spending has big multiplier 12/1/12 from econintersect
V. For more concerning Keynesian economics
      A. Maynard's Revenge: Keynesianism and the Crisis February16, 2010
      B.  Keynesian economics - Wikipedia

      C.  view information from the Institute for Economic Analysis
      D.A quiz for wannabe Keynesians 2/24/14

wikipedia on 
/John Maynard Keynes

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