Keynesian economics

• Classical Model


  A macroeconomic model that explains the long-run behavior of the economy
• Keynesian Model


  A macroeconomic model that explains the short-run behavior of the economy
• Market clearing


  Adjustment of prices until quantities supplied and demanded are equal
• Circular flow


  A diagram that shows how goods, resources, and (euro) payments flow between households and firms
• Say's law


  The idea that total spending will be sufficient to purchase the total output produced
• Household saving


  The portion of after-tax income that households do not spend on consumption goods
• Leakages


  Income earned, but not spent, by households during a given year
• Injections


  Spending from sources other than households
• Loanable funds market


  Arrangements through which households make their saving available to borrowers
• Supply of funds curve

  Indicates the level of household saving at various interest rates
• Demand of funds curve


  Indicates the level of private and public investment spending firms and governments plan at various interest rates
• Budget deficit


  The excess of government purchases over net taxes
• Net taxes


  Government tax revenues minus transfer payments
• Budget surplus


  The excess of net taxes over government purchases
• Disposable income


  The part of household income that remains after paying taxes
• Consumption function


  A positively sloped relationship between real consumption spending and disposable income
• Marginal propensity to consume (MPC)


  The amount by which consumption spending rises when disposable income rises by one euro
• Marginal propensity to save (MPS)


  The amount by which household spending rises when disposable income rises by one euro
• Autonomous consumption spending


  The part of consumption spending that is independent of income; also, the vertical intercept of the consumption function
• Government Spending Multiplier


  The amount by which equilibrium GDP changes as a result of a one-euro-change in government purchases
• Spending Multiplier


  The amount by which equilibrium GDP changes as a result of a one-euro change in autonomous consumption, investment, government purchases, or net exports
• consumption function

  is the relationship between consumption spending and the level ofincome
• Autonomous consumption


  The part of consumption that does not depend on income
• Marginal propensity to consume

  Fraction of additional income that is spent
• consumption function


  c=a+c*y
• Aggregate demand


  Ad=c+I+G
• Aggregate demand

  AD= a+c*Y+I+G
• Equilibrium output (y*)


  y*=a+I+G/(1-c)
• Multiplier


  1/(1-MPC)
• Disposable income (yD)

  income - net taxes (y-T)
• consumption function with taxes


  C=a+c(Y-T)
• Tax multiplier

  =-MPC/(1-MPC)
• Balanced budget multiplier 


  Impact on equilibrium output of simultaneous increases of equal size in government spending and taxes