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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 is the best definition of economic?
Humble Reply
what is aggregat demand in open economy
Dagim Reply
What is the full meaning of GDP
Akinbulejo Reply
gross domestic product
Yanish
Formula for calculating the percentage of change in price, quantity, price elasticity of demand
Augustina Reply
Given that the elasticity of supply for a good is 2 and the percentage change in price is 45%.What is the percentage change in quantity supplied
Mbe Reply
Please don't understand
Augustina
state and explainfour function of a costumer service
Egba Reply
the circular flow model of the economy is a simplification showing how the economy works and the relationship between income,production and spending in the economy as a whole
Anna Reply
It is an idea that show us the way the economy works about their income, production, and spending in the economy
Augustina
what is circular flow
Ntokozo Reply
what is economics?
Dorcas Reply
Economics is defined as the science that study human behaviour as a relationship between ends and scarce means which have alternative uses.
Emmanuella
economics is a social science concerned with the production,distribution, and consumption of goods and services
Michael
Economics as a science studies human behaviour as a relationship between ends and scarce means with alternative use.
Augustina
in 2021 Amazon reduced the annual subscription fee for its prime membership service which provides free two_day shipping on many goods and other benefits, from $119 to $99. Zoppa consulting, an investment firm estimated that before the price reduction, prime had 62million subscribers globally. If so, what is the arc elasticity of demand for a prime membership.
Joan Reply
Differences between microeconomics and macroeconomics
tatiana Reply
Macroeconomics deal with the economy as a whole.that is an economy affect the firm ,government and the households eg.unemployment, whilst Microeconomics deal with the the decision making of households,firm and government separately.
Amah
Microeconomics is the branch of economic which studies the behaviour of individual households, firms and industries whiles macroeconomic studies the economy as a whole. It looks at the economy from a a broader perspective.
Augustina
what is Economics
Ebem Reply
the branch of knowledge concerned with the production, consumption, and transfer of wealth and has Influence by sociology!!!!
Ajay
Economics is the study of how humans make decisions when they want to fulfil their requirements and desires for goods, services and resources.
Abdullah
Economics is the study how humans make decisions in the faces of scarcity.
Rose
economic is the study of how human make decision in the fact of scarcity.
Toang
Economics is a social science which study human behavior as a relationship between earn and scarce mean which have alternative uses
Juliet
what is market structure
Fatima
market structure in economics depicts how firms are differentiated and categorised based on types of goods they sell and how their operations are affected by external factors and elements.
Nasir
what is economic theory
Madara
what is demand
Gooluck Reply
demand is the willingness to purchase something
Mohamed
demand is the potential ability or williness to purchases something at a particular price at a given period of time..
Ahmed
Demand refers to as quantities of a goods and services in which consumers are willing and able to purchase at a given period of time. Demand can also be defined as the desire backed by ability to purchase .
Fadiga
what is demand
John Reply
is the production of goods in scarcity
David
thanks
John
Demand refers to as quantities of a goods and services in which consumers are willing and able to purchase at a given period of time.
Fadiga
Demand refers to the quantity of goods and services that a consumer is willing and able to buy at a given price over a period of time
Augustina
Do high interest rate in a country increase investment
Alfred
Government sector is the place they can gain more investment but the economy as a whole investment decrease
Augustina
what is demand of supply
music Reply
Please is it demand and supply or what
Augustina

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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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