Money and Banking Final Review

* Why Keynes developed the Keynesian Cross Model— he wanted to explain why the Great Depression had occurred and how government policy could be used.

* Aggregate demand: The total quantity of output demanded in the economy at different price levels.

YD= C + I + G + Nx

Consumer expenditure (spending), Investment, govt spending, net exports

* Aggregate output: The total production of final goods and services in the economy.

* Consumption function: The relationship between disposable income and consumer expenditure.

C= a + (mpc x YD )

a autonomous consumer expenditure (how much consumer will spend independent from income)

mpc marginal propensity to consume ( the fraction of extra income earned that you will spend)

YD disposable income (after tax income Yincome-Ttaxes)

* How taxes affect consumption & aggregate demand.

A rise in taxes does not affect aggregate demand directly, but it does lower the amount of income available for spending.

-if taxes goes ↑ then YD ↓ (disposable income)

* Aggregate output is positively related to planned investment spending

* Aggregate output is negatively related to the level of taxes.

* When interest rates are lower business firms are more likely to undertake an investment.

* IS curve traces out the points at which the total quantity of goods produced equals the total quantity of goods demanded. (goods market)

* LM curve is an equilibrium in the money market; quantity of money demand, equals quantity of money supplied. L-> demand for money M->money supply.

* Monetary policy: The management of the money supply and interest rates.

* Fiscal policy: Policy that involves decisions about government spending and taxation.

* Short run IS LM model – fixed price level

Long-run IS LM model – price level changes

* Aggregate demand curve is a relationship between the price and quantity of aggregate output demanded when the goods and money market are at...