StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

The Simple Keynesian Model and Its Policy Implications - Essay Example

Cite this document
Summary
The paper "The Simple Keynesian Model and Its Policy Implications" states that the Simple Keynesian Model can be used for a fiscal stabilization policy. Suppose the economy produces at a level Yf, which is the employment level. At Yf, aggregate output is equal to aggregate demand, that is, Yf = Ef. …
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER91.5% of users find it useful
The Simple Keynesian Model and Its Policy Implications
Read Text Preview

Extract of sample "The Simple Keynesian Model and Its Policy Implications"

The simple Keynesian model and its policy implications Introduction: John Maynard Keynes was a great economist who developed his theory at the background of the Great Depression of 1930. It was felt during the Great Depression and afterwards that the self-adjusting economic theory is failing to pull the global economy out of the depression. Something else had to be done; some added help to the adjustment process is needed. Keynes identified that added help as strict government intervention and considering a closed economy formulated his model for economic equilibrium. Keynes considered a closed economy because at that point of time, government intervention was the prime needs to stabilize the economy and role of the government gets severely distorted under an open economy. The following is a very simple representation of his theory known as the Simple Keynesian Model. For the above-mentioned model we assume that the aggregate price level is fixed. The Simple Keynesian Model The central idea of Keynesian model is the output to be at the equilibrium level, it has to be equated with the aggregate demand. If ‘Y’ stands for total output, that is, the GDP and ‘E’ equals the aggregate demand, then equilibrium condition requires: Y = E (1) The aggregate demand or the desired expenditures on output is a summation of household consumption or ‘C’, desired business investment demand or ‘I’, and government expenditure or ‘G’ (government expenditure is nothing but the government sector’s demand for goods and services). Incorporating all these components into the equilibrium condition, the equilibrium condition can be written as: Y = E= C + I + G (2) Now, national income or ‘Y’ in general can be decomposed into three parts – one part of the national income gets consumed (C), one part gets paid in taxes (T) and the rest is saved (S). So we may write: Y ≡ C + S + T (3) Again, as Y is the national product, so it is equivalent to the summation of consumption, realized investment (Ir) and government spending in we may write: Y ≡ C + Ir + G (4) Equating equation (2) and (3), we may write: C + S+ T ≡ Y = C + I + G Or, S + T = I + G (canceling out C from both the sides) Similarly, equating (2) and (4), we may write: C + Ir + G ≡ Y = C + I + G Or, Ir = I (canceling out C and G from both the sides) So, the equilibrium condition for output in Simple Keynesian Model is desired business investment equal to realized investment. At any disequilibria situation, (Ir – I) will either be greater than or less than zero. Ir and I may differ in the following ways. Case 1: Level of output ‘Y’ (Y ≡ C + Ir + G) exceeds the level of aggregate demand ‘E’ (E= C + I + G) Therefore, we have: Y>E Or, C + Ir + G > C + I + G Or, Ir>I In the above case, (Ir-I) represents the unintended inventory accumulation. This is the amount by which the total output level surpasses the aggregate demand and will result in the unsold output that exceeds the level of desired inventory of the firms. Case 2: Aggregate demand exceeds the total output level Therefore, we have: E>Y Or, C + Ir + G < C + I + G Or, Ir0) and ‘b’ is the marginal propensity to consume. The marginal propensity to consume implies the rise in consumption due to per unit rise in disposable income. ‘b’ is always less than one and greater than zero (0 Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Illustrate and discuss the simple keynesian model. What are its policy Essay”, n.d.)
Illustrate and discuss the simple keynesian model. What are its policy Essay. Retrieved from https://studentshare.org/miscellaneous/1542656-illustrate-and-discuss-the-simple-keynesian-model-what-are-its-policy-implications
(Illustrate and Discuss the Simple Keynesian Model. What Are Its Policy Essay)
Illustrate and Discuss the Simple Keynesian Model. What Are Its Policy Essay. https://studentshare.org/miscellaneous/1542656-illustrate-and-discuss-the-simple-keynesian-model-what-are-its-policy-implications.
“Illustrate and Discuss the Simple Keynesian Model. What Are Its Policy Essay”, n.d. https://studentshare.org/miscellaneous/1542656-illustrate-and-discuss-the-simple-keynesian-model-what-are-its-policy-implications.
  • Cited: 0 times

CHECK THESE SAMPLES OF The Simple Keynesian Model and Its Policy Implications

Neutrality of Money

The major influence on the monetary economics and its central role in most of the developed economies has been from the work of Milton Friedman who actually first accepted the ideas of Keynesian economics however then went on to argue against them outlining the greater role of the equilibrium money supply and demand as the key variable for achieving the objectives of monetary policy in any economy.... This view was deeply held by the classical economists and was subsequently endorsed by the keynesian model however, with the slight variations....
8 Pages (2000 words) Essay

Fiscal Framework for Ontarios Industrial Development

INTRODUCTION While analyzing effects of fiscal policies on the economic growth and development, it is important to consider both long-run and short-run implications of the proposed fiscal or monetary policy tools.... Sustainable fiscal policies advanced by Ontario government through sectoral neutrality and effective tax policy would be attractive to investors, thus more investments both in infrastructure and services.... Similarly, the policy maker should take into account the existing relationship between macro-economic variables and fiscal policy frameworks....
8 Pages (2000 words) Term Paper

Sports and Entertainment Management

This happens when making application of the keynesian demand-driven models or the Neo-classical supply driven models (Magnani 2013 ).... The case study about San Diego Padres is a great example of how a successful sports management operates.... The Padres anticipated the problems as much as possible and did their best to cope with them in a timely manner....
3 Pages (750 words) Essay

Keynesian macroeconomics

The theory of Real Business Cycles (RBC) hypothesises that all prices are flexible, even in the short run which leads to the implications that money is neutral in the short run and that classical dichotomy holds at all times.... hird, real business cycle theory assumes that monetary policy is irrelevant for economic fluctuations, this challenges the Keynesian argument that any correlation of money with output arises because the money supply is endogenous (King and Plosser, 1984)....
4 Pages (1000 words) Essay

The Impact of Keynesianism on Macroeconomic Policies of a State

imple Keynesianism is a term employed by Alan Booth to describe how the very broad agenda of 1930s Keynesianism was narrowed, by going through the Whitehall machine in the later years of the war, so that by the late 1940s the Keynesian program focused primarily on the simple manipulation of aggregate demand.... t is clear that to try and characterize a Keynesian policy regime is very difficult.... This program did not have much impact on policy in the early postwar years because of the government's emphasis on controls and planning, but after 1947 it became more important as fiscal policy displaced physical controls....
13 Pages (3250 words) Essay

Macroeconomic Coursework

Representative agent models are some efforts of economists to model and represent the macroeconomy as if it were a single unit.... On the other hand, stimulative fiscal policy measures are adopted by governments in response to recessions or economic downturns.... A recession, defined as two consecutive quarters of negative Gross Domestic Product (GDP) growth in a year, can be partially or wholly reversed by using a combination of macroeconomic measures or solutions such as fiscal or/and monetary policy measures....
11 Pages (2750 words) Essay

How Complicated Does the Model Have to Be

The balancing effect was overlooked by Keynes but has been discovered to be empirically unimportant and the expansionary implications of a decrease in the money wages due to the Keynes effect may be more than offset by the antagonistic influences that are related to debt deflation, the distributional shifts, and the expectations that are supposed to come from the on-going reductions of wages and prices.... This essay "How Complicated Does the model Have to Be" discusses complicating factors that are associated with this model can be addressed by a discussion that is information that will be aimed at understanding the diverse effects of money wage changes and employing the AD-AS model as a starting point....
7 Pages (1750 words) Essay

Neutrality of Money

keynesian views, however, suggested that the neutrality of money does not exist in the short run because of the behavior of the monopolistically competitive firms.... The paper "Neutrality of Money" states that only nominal variables in the economy change and real variables remain unaffected....
8 Pages (2000 words) Coursework
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us