by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is the Keynesian Approach to Unemployment and Inflation? Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy, such as tax cuts to stimulate consumption and investment, or direct increases in government spending that...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is the Expenditure Multiplier? A key concept in Keynesian economics is the expenditure multiplier. The expenditure multiplier is the idea that not only does spending affect the equilibrium level of GDP, but that spending is powerful. More precisely, it means that...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is a Macroeconomic Externality? A macroeconomic externality is where what happens at the macro level is different from and inferior to what happens at the micro level. For example, a firm should respond to a decrease in demand for its product by cutting its...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What are the Keynesian Assumptions in the Aggregate Demand and Aggregate Supply Model? The AD/AS diagram illustrates two Keynesian assumptions—the importance of aggregate demand in causing recession and the stickiness of wages and prices. Note that because of the...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What are Menu Costs? These costs of changing prices are called menu costs—like the costs of printing a new set of menus with different prices in a restaurant. Prices do respond to forces of supply and demand, but from a macroeconomic perspective, the process of...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is the Coordination Argument of Wage Stickiness?Keynes emphasized one particular reason why wages were sticky: the coordination argument. This argument points out that, even if most people would be willing—at least hypothetically—to see a decline in their own...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
How are Net Exports a Part of Aggregate Demand? Recall that exports are domestically produced products that sell abroad while imports are foreign produced products that consumers purchase domestically. Since we define aggregate demand as spending on domestic goods and...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is Government Spending as a Part of Aggregate Demand? The third component of aggregate demand is federal, state, and local government spending. Although we usually view the United States as a market economy, government still plays a significant role in the...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is Investment Expenditure? We call spending on new capital goods investment expenditure. Investment falls into four categories: producer’s durable equipment and software, nonresidential structures (such as factories, offices, and retail locations), changes in...
by TheBusinessProfessor | Feb 23, 2025 | Economic Analysis & Monetary Policy
What is Consumption Expenditure? Consumption expenditure is spending by households and individuals on durable goods, nondurable goods, and services. Durable goods are items that last and provide value over time, such as automobiles. Nondurable goods are things like...
