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OU ECON 1113 - Review of the Keynesian Cross Model

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ECON 1113 1st Edition Lecture 12 Outline of Last Lecture I. Review of Previous LecturesII. Keynesian Cross ModelOutline of Current Lecture I. The Keynesian Cross ModelA. The Inventory Adjustment MechanismB. The Concept of Non-Inflationary, Full-Employment GDP (Y*)C. Unemployment in the Model1. Fiscal Policies to Combat Unemployment2. Case Study: The Revenue Act of 1932D. Inflation in the Model1. Fiscal Policies to Combat Inflation2. Political Issues and Anti-Inflationary Fiscal PoliciesCurrent LectureI. I. The Keynesian Cross ModelA. The Inventory Adjustment Mechanism1. Diagram Explanationa. Planned Total Expenditure (PTE): the amounts households, firms, governmental units, and foreign traders (exports and imports) intend or plan on spending, found on the y-axisb. Nominal GDP (Y): the amounts households, firms, governmental units, and foreign traders (exports and imports) actually spend, found on the x-axisc. A 45 degree reference angle begins at the origin of the graph and extends outward, known as the Keynesian Cross equilibrium line- Equilibrium conditions in the Keynesian Cross- Planned Total Expenditure = Actual Total Expenditured. The PTE line equals C + I + G + (X – M)e. The point at which the two lines cross each other signifies optimal inventory2. When the PTE is not equal to the ATE, then inventories (goods produced in the past and placed in inventory) will adjust and bring the PTE and ATE into equalityThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.a. If the nominal GDP value is low, or below the equilibrium point, the PTE and ATE are low, and the amount produced does not reach the amount required to sustain the desired inventoryb. The distant between the two lines displays an unintended decrease in inventory because what people plan to buy exceeds what suppliers produceB. The Concept of Non-Inflationary, Full-Employment GDP (Y*)1. Will equilibrium Y = Ye necessarily equal Y* (non-inflationary, full-employment GDP)?a. Implies no inflation and no voluntary unemploymentb. Positive Employment Rate of approximately 5% (voluntary changing jobs or looking for new job)c. Frictional Unemployment is desirable because it implies economic efficiencyd. Keynes answered this question: No, because he observed unemployment greater than 5% when he wrote his book in the early 1930s (at which time, there was a 25% unemployment rateC. Unemployment in the Model1. Fiscal Policies to Combat Unemploymenta. In this instance, the government seeks to raise the graphical line of the PTE through the alterations in consumer spending (C) and government spending (G)b. Changes in G and/or tax collections (T) designed to change Y (nominal GDP = overall measure of economic activity)- As G increases and/or T decreases, the PTE moves upwardc. The 45 degree reference angle, or the ASk does not changed. Y* assumes a 5% unemployment rate naturally; however, when the Ye is lower than the more desirable Y*, the unemployment rate at Ye is greater than 5%e. A GDP gap is the dollar value of all goods and services not produced due to involuntary unemployment and occurs graphically between Ye and Y* on the x-axis2. Case Study: The Revenue Act of 1932D. Inflation in the Model1. Fiscal Policies to Combat Inflation2. Political Issues and Anti-Inflationary Fiscal


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OU ECON 1113 - Review of the Keynesian Cross Model

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