Econimics Lesson 01-Keynesian Theory

Keynesian Theory / the Keynesian Framework and the ISLM Model

I-        I=Investment

II-      S=Savings

III-    L=leakages

IV-   M=monitory

Determination of Output

Keynesian ISLM Model assumes price level is fixed

Aggregate Demand

Y^ad = C + I + G + NX

Equilibrium

Y = Y^ad

Consumption Function

C = a + (mpc ´ Y_D)

Investment

1.            Fixed investment

2.            Inventory investment

Only planned investment is included in Y^ad

Expenditure Multiplier

DI = + 100 Þ DY/DI = 200/100 = 2

                                1

Y = (a + I) ´                                          1 – mpc

A = a + I = autonomous spending

Conclusions:

1.            Expenditure multiplier = DY/DA = 1/(1 – mpc)
                whether change in A is due to change in a or I

2.            Animal spirits change A