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Week 4: Keynesian school (deel 2) (Keynes-consumption and investment:…
Week 4: Keynesian school (deel 2)
Keynes-consumption and investment
: Y=C+I
Investment demand:
Depends on interest rate
Depends on expectations and uncertainty --> marginal efficiency of capital
--> Investments up till interest rate = marginal efficiency of capital
Investment multiplier
: fluctuations in investment transmit themselves via their effect on consumption in fluctuations in income that are larger than those in investment.
Consumption demand:
Increases with income, but not at equal rate
Savings also increase with income
Keynes-Liquidity preference
Keynes disagreed with (neo)classicals that interest rates equate savings supplied and savings demanded (for Investment)
Savings depend on income:
Low interest rate stimulates investment, which translates into
higher income, and higher savings
Interest rate depends on liquidity preference (demand for money) and quantity of money (supply of money)
Theory of liquidity preference: demand for money:
Precautionary motive
Speculative motive
Transaction motive
Keynes-Equilibrium
High correlation between national income and employment
SR theory
“In the long run we are all dead”
Equilibrium: --> S=I
Y=C+I
S=Y-C
Low effective demand results in depression, lower income and employment
* Effect is larger than initial drop in effective demand -->Multiplier effect
Keynes-Government policy
Expansionary monetary policy might:
Lowers interest rate
Increases investment and employment
--> In Practice: Not suitable as stabilization policy
Fiscal policy: stabilize employment by influencing aggregate demand
Changes in public expenditure
Level of taxation ( one of the first to argue in favor of government intervention (without rejecting the market mechanism!)
Once market was stabilized, it could function efficiently
conclusion
Keynes directed economic theory to policy making
Time of Great Depression and mass unemployment
Governments can help the market in reaching an equilibrium state
Contemporary economics is combination of neoclassical microeconomics and Keynesian macroeconomics
Focus on determinants of income and employment, including cause of economic fluctuations