...FISCAL POLICY & MACROECONOMIC MODELS There are three macroeconomic models in which to analyze the effects of changes in fiscal policy: Keynesian, Monetarist and Classical. Keynesian Model The Keynesian model focuses on attempting to manage the “Demand” side of the economy by using taxation and spending to redistribute income and wealth. The rationale is that redistribution of income and wealth via taxation and use of transfer payments [government spending] will drive the “Demand” function thereby driving the overall economy. The Keynesian model makes no distinction between tax rates and tax revenues and assumes that government spending in the form of transfer payments will increase or decrease demand based on the level of spending AND the spending multiplier. The spending multiplier can be expressed mathematically as: Spending Multiplier = 1 / (1 – MPC) in which MPC is the “marginal propensity to consume.” Keynesian economics is based on the view that lower income brackets have higher MPC, while higher income earners have lower MPC. Accordingly, the transfer of income and wealth to lower income earners will transfer into increased economic growth because every dollar of transfer payments in theory will have a higher multiplier effect. The increase or decrease of “taxes-and-spending” should accelerate [or decelerate] economic growth depending on how it is applied. Observations: Keynesian economics ignores or does not take into account that changes in tax rates...
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...Homework 3 * Explain differences between Keynesian and Classical Economics. The differences between Keynesian and Classical Economics are as follows: Keynesian economics believe that when the economy is in a recession that price and wage remain the same and are inflexible. Wages are unable to be lowered beyond a certain point due to union contracts and minimum wage laws and will not be raised due to the supply of unemployed workers willing to work at the prevailing wages and the price of goods remain fixed due to steady supply and no change in demand. In order to jump start the economy Keynesian economics suggest that increased government spending will increase the GDP thereby shifting the aggregate demand curve which can help jumpstart the economy by creating more demand and resulting in the demand for labor to meet that demand. The classical economics viewpoint is that the economy will self-regulate over time and the government should take hands off approach. They believe that price and wage will remain flexible and increase or decrease as needed to maintain equilibrium in the economy. * In your opinion when (if ever) should the government use Keynesian economic policy? I believe the government should follow the Keynesian economic policy in times of recession such as they did in the most recent one in 2009. The Keynesian policy will help increase the aggregate demand by raising the GDP which will create the need for workers to meet that demand. This helps...
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...Aggregate Demand and Supply Model Option Two Simona Lewis ECO/372 January 14, 2015 Christopher Dabbs Aggregate Demand and Supply Model Option Two Describe the current state of following economic factors. The Interest Rates. When it comes to the interest rates, there are several things that he or she needs to know, such as long-term and short –term interest rates. The term interest rates are the amounts “that are charged or paid for the utilization of financial assets” (Colander, 2013, p 657). On-the-other-hand, the term long-term interest rate is referred to the amounts for the use of the financial assets for the extended repayment periods for his or her loans (Colander, 2013). For example, when he or she is buying a house that has a mortgage of 15 to 30 years that is long-term (Colander, 2013). However, with the short-term interest rate, are the amount paid for the utilization of the financial asset with “shorter repayment periods, such as a deposit and checking accounts” (Colander, 2013, p. 658). So, in-other-words long-term interest rate is decided by the loanable fund market, and the short-term interest rate is decided in the money market (Colander, 2013). Now, since he or she understands how the interest rates works, in The United States, the interest rates are actually cheap, but “not the long-term rate are not that cheap” (Conerly, 2013, para. 4). Therefore, the short-term interest rate is controlled by the Central Bank, which is The United States Federal Reserve...
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...Economics and Growth - The demand curve is likely to change upwards or rise as a result of changes in a number of factors. One, if there is a move up in the price of an alternative commodity, or decrease in price of the giv...[ view ] Classical Economics vs. Keynesian Economics :: 5 Works Cited Length: 1187 words (3.4 double-spaced pages) Rating: Red (FREE) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - My research of Classical Economics and Keynesian Economics has given me the opportunity to form an opinion on this greatly debated topic in economics. After researching this topic in great lengths, I have determined the Keynesian Economics far exceeds greatness for America compared to that of Classical Economics. I will begin my paper by first addressing my understanding of both economic theories, I will then compare and contrast both theories, and end my paper with my opinions on why I believe Keynesian Economics is what is best for America. Classical Economics is a theory that suggests by leaving the free market alone without human intervention; equilibrium will be obtained. This theory was the first school of thought for economists and one of the major theorists and founders of Classical Economics was Adam Smith. Smith stated, “By pursuing his own interest, he (man) frequently promotes that (good) of the society more effectually than when he really intends to promote it. I (Adam Smith) have never known much good done by those...
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...Unemployment Rate Unemployment rate in a nation can tell how well the nation is doing economically. Unemployment rate has both positive and negative effects on the economy. It also impacts the governments ability to generate income through taxes. It can impact positively where the unemployment rate is low, indicating an economic boom. On the other hand, negative impact arises from high unemployment that indicates poor economic conditions for the country in general. Currently, the United States is experiencing a slow recovery from the economic recession and over the years it seems the recession is subsiding giving way to economic growth. Data showing monthly unemployment percentage has been on a downward trend with some fluctuation from month to month. The unemployment rate in the United States increased to 6.70 percent in February 2014 from 6.60 percent in January 2014. In December of 2013 dropped to 6.7 percent, the lowest since October 2008 ( United States Unemployment Rate, 2013). However, the improvement in unemployment rate may not be driven by increased employment. It could be due to long term unemployed workers giving up on the job search and leaving the job market entirely. The unemployment rate has an effect on the aggregate supply and demand. Unemployment means that fewer people have disposable income to spend on goods and services (zhang, 2014). Lack of spending from the consumers makes it difficult for business to thrive and expand, which reduces economic...
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...Saving Function KM: The Multiplier Model - Principles of Macro - RIT - Dr. Jeffrey Burnette The Keynesian Model: The Multiplier Model Assumptions • Each market is analyzed on an aggregate scale (One interest rate, One type of labor, One type of output) Differences from the Classical Model • The Keynesian model does not assume that markets clear in the short-run. In fact, it believes that prices are sticky downward. That is, prices may not decrease to bring the market to equilibrium. This is why it focuses on the short-run. • In the short-run spending depends upon income. • Whereas the classical model focused on equilibrium in the labor market determining the level of output, the Keynesian model will focus on the domestic spending of consumers. The Keynesian Model w/out Government • Households have 2 choices for spending their income, Purchase goods and services (Consumption) or Save. • Firms have 2 types of expenditures, purchase goods and services (Consumption) or purchase equipment and structures from borrowed funds (Planned Investment). • In the short-run, planned investment is taken to be independent of income. • There is a funds market where savings is made available to firms that wish to borrow. Disposable Income = Income - Taxes Since there is no government, taxes are equal to zero. Therefore, real income is equal to real disposable income. Y = YD 1 KM: The Multiplier Model - Principles of Macro - RIT - Dr. Jeffrey Burnette Consumption Function - Algebraic...
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...Principles of Macroeconomics, 9e - TB1 (Case/Fair/Oster) Chapter 18 Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economics 18.1 Keynesian Economics 1 Multiple Choice 1) Who wrote the General Theory of Employment, Interest, and Money? A) Adam Smith B) David Ricardo C) Milton Friedman D) John Maynard Keynes Answer: D Diff: 1 Topic: Keynesian Economics Skill: Fact 2) Keynesian economics includes the idea that A) economic policies are ineffective. B) the economy is basically stable. C) prices adjust to clear the markets. D) labor markets don't always clear due to wage rigidities. Answer: D Diff: 1 Topic: Keynesian Economics Skill: Fact 3) Among the propositions of the Keynesian school of thought is A) economic policies are ineffective. B) aggregate supply management is the key to a stable economy. C) aggregate demand determines equilibrium output. D) rational expectations. Answer: C Diff: 1 Topic: Keynesian Economics Skill: Fact 4) Keynes believed which of the following? A) The government has a role to play in fighting inflation, but not in fighting unemployment. B) The government has a role to play in fighting unemployment, but not in fighting inflation. ...
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...Economic Critique ECO/372 University of Phoenix Economic Critique Aggregate supply and demand are two of the most important elements to consider in all of macroeconomic, regardless of which of the many theories or models one applies. Understanding how various economic factors influence supply and demand is very important particularly vital to the government while determining economic policy. Factors like unemployment, expectations, consumer income, and interest rates all have an affect on the aggregate supply and demand. These factors will be discussed from both the Keynesian and Classical macroeconomic perspective. Current State of Unemployment, Expectations, Consumer Income, and Interest Rates Unemployment The unemployment rate has been steadily dropping over time. As of the summer of 2012 the unemployment rate was at 8-1/4 percent, and fell to a little below 8 percent as of January 2013 (Board of Governors of the Federal Reserve System, 2013). However, this improvement is still well above unemployment rates pre-recession. Also, a larger portion of the unemployed have been so for six months or longer (Board of Governors of the Federal Reserve System, 2013). In more recent months according to "Bureau Of Labor Statistics" (2013), “the unemployment rate edged down to 7.4 percent as of July 2013” (News Release USDL-13-1527 ). Economists try to interpret this information in order to better determine which way government policy should go. According economist, John...
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...several months or years in an economy organized on free-enterprise principles. The business cycle is the upward and downward movements of levels of GDP (gross domestic product) and refers to the period of expansions and contractions in the level of economic activities (business fluctuations) around its long-term growth trend. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (an expansion or boom), and periods of relative stagnation or decline (a contraction or recession).Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite being termed cycles, these fluctuations in economic activity can prove unpredictable. History A BASIC ILLUSTRATION OF ECONOMY/BUSINESS CIRCLE. Theory The first systematic exposition of periodic economic crises, in opposition to the existing theory of economic equilibrium, was the 1819 Nouveaux Principes d'économie politique by Jean Charles Léonard de Sismondi. Prior to that point classical economics had either denied the existence of business cycles, blamed them on external factors, notably war, or only studied the long term. Sismondi found vindication in the Panic of 1825, which was the first unarguably international economic crisis, occurring in peacetime. Sismondi and his contemporary Robert Owen, who expressed similar but less systematic thoughts in 1817 Report to the Committee of the Association for...
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...increase in Money Supply upon the overall level of economic activity, using both the traditional transmission mechanism, and in the IS'LM model. Are there any major differences between these 2 models? Your answer should include all relevant diagrams. (20 marks IN RELATION TO THIS QUESTION, STUDENTS WOALD BE EXPECTED TO IDENTIFY AND EXPILIIN THE TRADITIONAL TRANSMISSION MECHANISM AND BRIEFLY EXPLAIN ITS CONSTITUENT PARTS; NAMELY MONEY MARKET, THE INVESTMENT DEMAND CARVE, AND FINALLY THE 45 DEGREE LINE PRODUCT MARKET MODEL. THEY WOALD BE EXPECTED TO BRIEFLY DESCRIBE THE EFFECT OF AN INCREASE IN MONEY SAPPLY WHEN THE ASSET DEMAND CURVE FOR MONEY IS RELATIVLY FLAT AND THE INVESTMENT DEMAND CT]RVE IS RELATIVELY STEEP. BETTER ANSWERS WOALD EXPLAIN WHAT THE LATTER 2 SLOPES INDCATE ABOUT THE PARTICULAR MARKETS. ANSWERING THIS QAESTION STUDENTS SHOALD IDENTIFY THE 2 PARTICULAR WEAKNESSES THAT CHARACTERISE THE TRADITIONAL TRANSMISSION MECHANISM. THE ARTE THE 2 PROBLEMS OF TryHEN INTERDEPENDENT VARIABLES AND IN TARN UNCERTAIN OR ANPREDICTABLE OR INDETERMINATE OUTCOMES OR RESALTS. OK. AS PART OF THEIR ANSWERS STADENTS SHOULD CERTAINLY MENTION THE FEEDBACK EFFECT OR THE RELATION BETWEEN CHANGES IN GDP OR Y, AND IN TARN CHANGES IN THE LEVEL OF TRANSACTIONS DEMAND FOR MONEY. FINALLY STUDENTS SHOALD EXPLAIN THE IS.LM MODEL BRIEFLY AND SHOW THE EFFECTS...
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...Division, and School] | |Official Time Table of the course | |Approved course syllabus signed by Instructor & Program chair | |Objective and Outcome Mapping | |Lesson Plan | |Assessment Scheme and Schedule | |Model Question Paper (Semester End Examination (SEE)) | |Lectures Slides, Tutorials and other Learning Resource provided (See Annexure 1) | |Assignments / Course Projects | |Evaluated samples of Assignments / Course Projects (One sample each from Excellent, Average and Satisfactory Bands) (See | |Annexure 2: Hard Copy of Evaluated Project Reports) | |Quizzes and CAT-I & II question papers and...
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...John Maynard Keynes He was a famous economist born on 5th June 1883. His father was an economics professor at Cambridge. son of a Cambridge economics professor If ever there was a rock star of economics, it would be John Maynard Keynes. Keynes shares his birthday, June 5th, with Adam Smith and he was born in 1883, the year communist founder Karl Marx died. With these auspicious signs, Keynes seemed to be destined to become a powerful free market force when the world was facing a serious choice between communism or capitalism. Instead, he offered a third way, which turned the world of economics upside down. In this article, we'll examine Keynes' doctrine and its impact. (To read about Adam Smith, be sure to check out Adam Smith: The Father Of Economics.) Keynes was ultimately a successful investor, building up a private fortune. His assets were nearly wiped out following the Stock Market Crash of 1929, which he failed to foresee, but he soon recouped. At Keynes's death, in 1946, his worth stood just short of £500,000 – equivalent to about £11 million ($16.5 million) in 2009. His first prediction was a critique of the reparation payments that were levied against the defeated Germany after WWI. Keynes rightly pointed out that having to pay out the cost of the entire war would force Germany into hyperinflation and have negative consequences all over Europe. He followed this up by predicting that a return to the prewar fixed exchange rate sought by the chancellor of the exchequer...
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...Executive Summary The topic of this paper is mainly discussed on the causes of inflation by explaining how the sustained inflation occurs as well as the role of played by monetary policy in the inflation process. The author in this paper agreed that sustained inflation is always and everywhere a monetary phenomenon and this has been agreed by both monetarist and Keynesian assumption. Besides that, the author also mentioned that we need to understand why inflationary monetary policy occurs. This paper also examines the inflation issue faced by United States and accommodating policy which has been used in order to achieve high employment target. Contractually, expectation is an important element in the anti-inflation policy to minimize the cost and output loss due to unemployment. Thus, a non-accommodating policy may be optimal to prevent the sustained inflation. The structure of this working paper began with executive summary followed by the assumptions of the paper and key concepts as well as the empirical evidence provided by the author. The author also provides some suggestions on how the monetary policy can be conducted to deal with the inflation process. Background/Assumptions of the paper Frederic S. Mishkin, the author of the working paper of ‘The Causes of Inflation’ is currently teaching at the Columbia Business School since 1983. This working paper was published in September, 1984 in National Bureau of Economic Research. He is also...
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...Post-Keynesian Economics Post-Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson. Keynes' biographer Lord Skidelsky writes that the post-Keynesian school has remained closest to the spirit of Keynes' work, particularly in his monetary theory and in rejecting the neutrality of money. Introduction Post-Keynesian economists maintain that Keynes' theory was seriously misrepresented by the two other principle Keynesian schools: neo-Keynesian economics which was orthodox in the 1950s and 60s - and by New Keynesian economics, which together with various strands of neoclassical economics has been dominant in mainstream macroeconomics since the 1980s. Post-Keynesian economics can be seen as an attempt to rebuild economic theory in the light of Keynes's ideas and insights. However even in the early years in the late 1940s post-Keynesians such as Joan Robinson sought to distance themselves from Keynes himself, as well as from the then emergent neo-Keynesianism. Some post-Keynesians took an even more progressive view than Keynes with greater emphases on worker friendly policies and re-distribution. Robinson, Paul Davidson and Hyman Minsky were notable for emphasising the effects on the economy of the practical differences between different types of investments in contrast to Keynes more abstract...
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...Cambridge Resources for the IB Diploma Paper 1 (SL and HL) markschemes Examples of markschemes for Exam practice: paper 1 in the Economics for the IB Diploma CD-ROM are provided below. Paper 1 section A: Microeconomics Chapter 2 Competitive markets: demand and supply SL/HL core topics Part (a) questions 2.3 (a) Answers may include: • Definitions of demand and quantity demanded. • Theory of demand: law of demand with reference to changes in demand and factors that can cause changes in demand. • Demand and supply diagram showing initial equilibrium price and quantity, and a leftward shift in the demand curve, resulting in a lower equilibrium price and quantity and showing that there is no contradiction. • Examples of demand curve shifts and movements along a demand curve. Answers may include: • Definitions of supply and quantity supplied. • Theory of supply: the law of supply with reference to changes in supply and factors that can cause changes in supply. • Demand and supply diagram showing initial equilibrium price and quantity, and a rightward shift in the supply curve, resulting in a lower equilibrium price and greater equilibrium quantity. • Examples of supply curve shifts and movements along a supply curve. Answers may include: • Definitions of normal good, excess demand, reallocation of resources. • Theory of demand and supply with reference to excess demand, the factors that can cause shifts in the demand curve and the role...
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