Keynesian Demand-Side Economics

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Keynesian Demand-Side Economics Demand creates its own Supply”

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Keynesian Demand-Side Economics. “ Demand creates its own Supply”. DEMAND SIDE Economics. 1960’s- 1970’s Consumer Based Keynesian Economics John Maynard Keynes Government tries to influence Gross Domestic Production by changing the Aggregate Demand Goal is to promote full employment. - PowerPoint PPT Presentation

Transcript of Keynesian Demand-Side Economics

Page 1: Keynesian Demand-Side Economics

Keynesian Demand-Side Economics

“Demand creates its own Supply”

Page 2: Keynesian Demand-Side Economics

DEMAND SIDEEconomics

• 1960’s- 1970’s

• Consumer Based

• Keynesian Economics– John Maynard Keynes

• Government tries to influence Gross Domestic Production by changing the Aggregate Demand

• Goal is to promote full employment

Page 3: Keynesian Demand-Side Economics

A/an _________ makes purchases of goods and services for personal use.

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76%

6%

1 2 3 4

1. Producer2. Economist3. Consumer4. manufacturer

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"The role of people is to keep ideas alive until a-crisis occurs.”

Crisis Occurs - Great

Depression

Classical Economists: in a recession, wages and

prices would decline to restore full employment

Keynes Argues: Falling prices and wages, by depressing people's

incomes, would prevent a revival of spending

Government would spend and decrease taxes when

private spending was insufficient and threatened a

recession

Government would reduce spending and increase taxes when private spending was too great and threatened

inflation

Page 5: Keynesian Demand-Side Economics

Theory

Direct determinant of output, investment, employment, is amount of money being spent, or aggregate demand.

The more people spend, the more people are employed and the

more output is produced.

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One of the results of the decrease in consumer spending is the:

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73%

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1. decrease in savings. 2. downward trend in

the economy. 3. rise in housing costs. 4. advertising.

Page 7: Keynesian Demand-Side Economics

Government Actions(Demand Side)

• Increase Government Spending– Stimulus Package– Tax Rebate– “Cash for Clunkers”

• Taxes Increase (especially for businesses)

Page 8: Keynesian Demand-Side Economics

Focus on demand side

Aggregate Demand (AD) management–Aggregate demand is the total

demand in an economy for all the goods and services produced

Page 9: Keynesian Demand-Side Economics

How to increase ADIncrease government spending

• government spends more to replace the missing private investment with public investment, financed by deliberate deficits

• government spending and taxing to stabilize the economy.

Page 10: Keynesian Demand-Side Economics

How to increase ADIncrease C (consumption & consumer sovereignty)

Government intervention through fiscal and monetary policies may be desirable to stabilize the business cycle (the ups and downs in the economy)

• decrease taxes (fiscal policy)• increase money supply (monetary policy)

Page 11: Keynesian Demand-Side Economics

The amount and type of goods that the consumer purchases depends

largely on:

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0%

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1. product improvement.

2. advertising. 3. ability to pay. 4. credit bureaus.

Page 12: Keynesian Demand-Side Economics

DEMAND FOR INVESTMENT SPENDING IS DRIVEN BY

BUSINESS EXPECTATIONS OF PROFITABILITY.

Page 13: Keynesian Demand-Side Economics

Supply or Demand side expansion?P

Y

P*1

Ye*1

0

AD1

AS1

AS2

P*2

Ye*s

If the recovery was supply-driven, then there should be an increase in output with steady or falling prices.

Page 14: Keynesian Demand-Side Economics

Supply or Demand side expansion?P

Y

P*1

Ye*1

0

AD1

AS1

P*2

Ye*s

AD2

If the expansion was demand-driven, output and prices would both rise.

Page 15: Keynesian Demand-Side Economics

Aggregate demand determines the volume of goods that firms sell.- increases production- increases job creation- increases consumer spending

Page 16: Keynesian Demand-Side Economics

In the American economy, consumers play an important role because:

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1. by buying products they are directing production.

2. they are the smallest part of the population.

3. they elect government planners.

4. they purchase products on credit.

Page 17: Keynesian Demand-Side Economics

As total consumer income increases:

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86%

14%

1 2 3 4

1. demand decreases.2. demand remains

constant. 3. demand increases. 4. price decreases.

Page 18: Keynesian Demand-Side Economics

Which of the following situations demonstrates the idea of consumer

sovereignty?

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1. Mike makes wood carvings because people will buy them.

2. Ann bakes cake for her family every Saturday.

3. Mike draws pictures because he enjoys doing it.

4. Matt cuts his grass every week so it doesn't get too tall.