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They believe in the theory that the economy was self-regularing and would correct itself without goverment interference. They believe that markets would eliminate persisten shortages or surpluses.
John Maynard Keynes
He argued that economy was not sell correcting. He offered an explanetion of the Great Depression, and suggested as acure, that the goverment should play an active role in the economy.
The theory that supply creates its own demand.
Classical view of unemployment
Was the result of a short-lived adjustment period in which wages and prices decline or people voluntarily choose not to work. Thus, there is a natural tendecy for for the economy to restore full employment over time.
- Is the sum of consumption (C), investment (I), goverment spending (G) and net exports (M-N). Also known as aggregate spending or aggegate demand.
- The graph or table that shows the amount hoseholds spend for goods and services at different levels of disposable income.
- Yd= C + S
- C= Consumption
- S= Savings
- The amount by which personal consumption expenditures exceed disposable income.
- S=Yd - C
Consumption that it is independent of the level of disposable income.
The amount of disposable income households do not spend for consumer goods and services.
The 45 degree line
It is a geometric construct. It indicates all points where aggregate real income (horizontal x) and consumption (vertical x) are equal.
Marginal propensity to consume (MPC)
- The change in consumption resulting from a given change in real disposable income.
- MPC = chg in consumption / chg disposable income
Marginal Propensity to save (MPS)
- The change in savings resulting from a given change in real disposable income.
- MPS = chg in savings / chg in disposable income
Reason the consumption function shifts
- It shifts only when a factor other than real disponsable income changes.
- The Price level
- The interest Rate
- Stock and durable goods
A shift in the consumption function caused by achange in the value of real and financial assets.
(gross private domestic investment) consiste of spending of newly produce nonresidential structures, such as factories, equipment,changes in inventories and residential structures.
Investment demand curve
The curve that shows the amount business spend for investment goods at different posible rates of interest.
Spending that does not vary with the current level of disposable income.
Aggregate expenditures functions (AE)
The function that represents total spending in a economy at a given level of real disposable income. C + I + G + (X - M)