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By the end of this section, you will be able to:
  • Explain real GDP, recessionary gaps, and inflationary gaps
  • Recognize the Keynesian AD/AS model
  • Identify the determining factors of both consumption expenditure and investment expenditure
  • Analyze the factors that determine government spending and net exports

The Keynesian perspective focuses on aggregate demand. The idea is simple: firms produce output only if they expect it to sell. Thus, while the availability of the factors of production determines a nation’s potential GDP    , the amount of goods and services actually being sold, known as real GDP    , depends on how much demand exists across the economy. This point is illustrated in [link] .

The keynesian ad/as model

Keynesian view of the AD/AS model shows that with a horizontal AS, a decrease in demand leads to a decrease in output, but no decrease in prices.
The Keynesian View of the AD/AS Model uses an SRAS curve, which is horizontal at levels of output below potential and vertical at potential output. Thus, when beginning from potential output, any decrease in AD affects only output, but not prices; any increase in AD affects only prices, not output.

Keynes argued that, for reasons we explain shortly, aggregate demand is not stable—that it can change unexpectedly. Suppose the economy starts where AD intersects SRAS at P 0 and Yp. Because Yp is potential output, the economy is at full employment. Because AD is volatile, it can easily fall. Thus, even if we start at Yp, if AD falls, then we find ourselves in what Keynes termed a recessionary gap    . The economy is in equilibrium but with less than full employment, as shown at Y 1 in the [link] . Keynes believed that the economy would tend to stay in a recessionary gap, with its attendant unemployment, for a significant period of time.

In the same way (though not shown in the figure), if AD increases, the economy could experience an inflationary gap    , where demand is attempting to push the economy past potential output. As a consequence, the economy experiences inflation. The key policy implication for either situation is that government needs to step in and close the gap, increasing spending during recessions and decreasing spending during booms to return aggregate demand to match potential output.

Recall from The Aggregate Supply-Aggregate Demand Model that aggregate demand is total spending, economy-wide, on domestic goods and services. (Aggregate demand (AD) is actually what economists call total planned expenditure. Read the appendix on The Expenditure-Output Model for more on this.) You may also remember that aggregate demand is the sum of four components: consumption expenditure, investment expenditure, government spending, and spending on net exports (exports minus imports). In the following sections, we will examine each component through the Keynesian perspective.

What determines consumption expenditure?

Consumption expenditure is spending by households and individuals on durable goods, nondurable goods, and services. Durable goods are things that last and provide value over time, such as automobiles. Nondurable goods are things like groceries—once you consume them, they are gone. Recall from The Macroeconomic Perspective that services are intangible things consumers buy, like healthcare or entertainment.

Questions & Answers

what the word federal mean
Kabba Reply
Meaning of "movement along curve?
Lizabeth Reply
There is movement along curve whenever the 'price' is affected
Isha
its mean price is positively response as demand change and price is negatively reaponse as supply changes
Mudasir
its mean when quantity demanded of commodity changes due to a change in its price ,keeping other factors constant, it is know as change in quantity demanded.
Gyamfua
pleas wat the formula when calculating for equilibrium point
Irene
when there is increase in the price
sautil
when there is increase in demand, demand will decrease.
Shadrick
A movement along curve is a movement on the curve mainly caused by a change occured in both quantity demand and quantity supplied.
Aarohi
what is demand
Dennis Reply
unwilling to buy good quality at a particular price and a particular time
Musa
Demand is the willingness and ability to buy goods and services at different prices at a given time.
Aarohi
is production function different from psychological law of consumption?
Kshirodra Reply
why supply is not the same quantity supplied
emmanuel Reply
What is Elasticity?
Kamara
I don't even understand
Awuah
what is damand
Cletus
Elasticity is an economic concept used to measure the change in the aggregate quantity demand for a goods or service in relation to price movements of that goods and service.
Gyamfua
Demand is an economic principal referring of a consumers desire to purchase goods and service and willingness to pay a price for a specific goods or service.
Gyamfua
supply is not the same as quantity supplied, because when economic refer to supply, they mean the relationship between a range of price an the quantity supplied those price -are relationship that can be illustrated with a supply curve or supply schedule
Gyamfua
Is a science which study human behavior as a relationship between ends and scares means which have alternative uses
BOOMBA Reply
I dont think so
Mahmood
It is Economic growth and stability
Mahmood
How Economic recovery growth Planning
Mahmood Reply
Expatiate your question
Awuah
Yh
Berry
Are bonds the same as liabilities?
Anderson Reply
Demend create it own supply how?
Mahmood
what is way ofrece thinking
Mahmood
what is the Economic way thinkig?
Mahmood
what is gasoline
Deepak Reply
how to know which products demand
Deepak
in other words economic can be define as what?
Ojarigho Reply
what is the difference between economics activities and economics system
Joshua Reply
what is the difference between price elasticity of demand and income elasticity of demand
Ellen Reply
what is demand
Alpha Reply
What is demand
Musa
is a measure of responsiveness at which a consumer is willing and able to offer a particular product at a given period of time
Manu
what is consumer
chill Reply
what is economics?
Odei Reply

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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