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keynes assignment help

  1. 1. Keynesian theory
  2. 2. Basic assumption of model It was the first model to explain why the output fluctuate around its potential output. There was interdependence between output and spending i.e. spending determines output and output and income determines spending. Price are constant in the short run Demand is the main component in deciding equilibrium output. Economy can supply whatever amount of goods are demanded at same price level. AS curve will be horizontal.
  3. 3. Aggregate demand It is the sum total of the goods demanded in an economy. In the Keynesian model, AD= C+ I + G + NX WHERE C is consumption by household I is investment in machines or capital formation. G is government expenditure NX is net exports i.e. exports - imports
  4. 4. Equilibrium output It is that level of output at which the aggregate demand is equal to actual output. AD refers to the planned demand i.e. the amount of output they are planning to demand. In the figure, AD is plotted and to find the equilibrium we have drawn 45 line . Reason being AD should be equal to Y
  5. 5. Consumption Consumption function is given by: C= c͞ + cY where C = minimum level of consumption / consumption at zero level of income c = marginal propensity to consume i.e. by how much amount the consumption increase due to increase in the income. numerically it is C / Y if c is 0.9, it indicate that if income rise bi 1$ , then the level of consumption will rise by 90 cents.
  6. 6. Saving function Income is either consumed or saved. S + C = Y S= - C + ( 1-c ) Y Saving increases with an increase in income
  7. 7. Investment For convenience investment was assumed to be autonomous I= I Aggregate Demand AD= C+ I considering G, NX=0 C = C + c Y I = I AD= C +cY + I = A + c Y
  8. 8. Graphical presentation of aggregate demand function AD= A + c Y Where A decide the intercept c decides the slope Higher A , higher Y higher c , higher Y E is the equilibrium output. I
  9. 9. Equilibrium output AD = Y Y = A + c Y Y = 1 A 1 – c Another method to find the equilibrium is equating saving and investment Reason: AD= C + I Y= C + S for equilibrium AD = Y, implying I = S
  10. 10. multiplier Multiplier tells the amount by which the equilibrium output will change due to the change in the autonomous aggregate demand. Suppose in an economy, there is an increase in autonomous aggregate demand by A . Output will increase by this amount. Thus, income also rise by this amount. Spending will increase by c times A. this process will continue so, the change in total output is much more than the initial increase in aggregate demand.
  11. 11.  Y= A + c A + c^2 A + ……….  Y= 1 A 1-c
  12. 12. Government sector There are three components that add to aggregate demand when we include the government sector. These are: 1.Government taxes: TA = tY i.e. income tax and t is the tax rate. 2.Government transfers: TR it is the payment that government makes to individuals in form of unemployment benefit, old age benefits etc 3.Government expenditure: G is the expenditure by the government on the goods and services
  13. 13. Aggregate demand in three sector model AD = C + c( Y+ TR –t Y) + Ῑ + Ḡ = Ᾱ + c( 1-t) Y AD will become flatter5 And intercept will be higher by the amount Ḡ + c TR Equilibrium change to E’ and output to Ye’. aAD’E’ Ye’
  14. 14. Effect on equilibrium output due to change in Ḡ Effect is same as the change in the autonomous spending. Multiplier has reduced because the disposable income has reduced. Now, a proportion of income will be given to government as tax Higher the tax , lower the multiplier. It is just like a reduction in MPC.
  15. 15. Effect on equilibrium output due to change in tax rate Suppose the income tax rate reduced.  this will increase the disposable income of the individual by the amount t Y. Thus the increase in aggregate demand is MPC times change in income. Due to induced spending, income will be generated and aggregate demand will further increase by MPC ( 1-t’) times change in Y. thus total change in equilibrium output is given by :
  16. 16. Effect on equilibrium output due to change in transfer payment It is given by: Now, the multiplier is less than the government expenditure because the part of the increase of the income is saved. Thus, the effect is less .
  17. 17. Budget surplus BS = tY -G - TR Where t Y is the tax revenue G is government expenditure TR is transfer payment.
  18. 18. Change in budget surplus due to increase in government expenditure It has two components: 1. the reduction in budget surplus by the amount G 2.Increase in the tax revenue due to the increase in the income. This will increase the surplus by t Y. where Now, budget surplus = - G+ 1 / t [ 1-c(1-t)] G = - (1-c) (1-t)/ [ 1-c(1- t)]
  19. 19. Change in budget surplus due to increase in tax rate This will increase the budget surplus by t Y. but this will reduce the disposable income in the economy and thus – t’ Y. Increase in tax rate will increase the budget surplus , despite the fact that it will reduce the output.
  20. 20. For further Info :  +1-617-874-1011 (USA) +44-117-230-1145 (UK) +61-7-5641-0117 (AUS)   http://myassignmenthelp. net/Assignment_Help_Podcasts/Poderator.xml