John Maynard Keynes was an influential 20th century English economist known for developing Keynesian economics. Some of his key ideas included that employment is determined by effective demand, which depends on aggregate supply and demand. Consumption and investment determine aggregate demand, with consumption depending on income and propensity to consume. The multiplier effect means that a change in investment leads to a proportional change in national income and output. Interest rates are determined by the supply of money and liquidity preference. Keynes argued governments could fight unemployment through fiscal policy like taxation and public investment.
In Macroeconomics Income and Employment are interchangeable terms, since in the short-run National income depends on the total volume of employment or economic activity in the country. As income and employment are synonymous the employment theory is also called income theory.
It should be clear to readers that the classical economists did not formulate any specific theory of employment as such. They only laid down certain postulates which subsequently developed as a theory.
In Macroeconomics Income and Employment are interchangeable terms, since in the short-run National income depends on the total volume of employment or economic activity in the country. As income and employment are synonymous the employment theory is also called income theory.
It should be clear to readers that the classical economists did not formulate any specific theory of employment as such. They only laid down certain postulates which subsequently developed as a theory.
The Major reason for the people’s demand for money is that it is needed in any economy in which almost every person and firm sells goods and services for money and in turn uses money to buy the goods and services offered by others. Functionally this amount of money used as a medium of exchange. Classical theory explained the demand for money as essentially a demand resulting from this need for money as medium of exchange.
In Keynesian theory, money becomes much more than a medium of exchange, much more than a medium of exchange, much more than a device for meeting transactions in the marketplace. People also demand money for speculative purposes and as security against unforeseen needs for cash reserves. The break down of the demand for money into transactions and precautionary and speculative demands plays a vital part in the theory of Keynes.
The Major reason for the people’s demand for money is that it is needed in any economy in which almost every person and firm sells goods and services for money and in turn uses money to buy the goods and services offered by others. Functionally this amount of money used as a medium of exchange. Classical theory explained the demand for money as essentially a demand resulting from this need for money as medium of exchange.
In Keynesian theory, money becomes much more than a medium of exchange, much more than a medium of exchange, much more than a device for meeting transactions in the marketplace. People also demand money for speculative purposes and as security against unforeseen needs for cash reserves. The break down of the demand for money into transactions and precautionary and speculative demands plays a vital part in the theory of Keynes.
Calicut university Second semester ba economics third module “ Keynesian theory “ document. Keynesian theory , demand ,effective demand, aggrigate demand, supply ,effective supply, aggregate supply,Conseption, conseption function ,saving , saving function , averagepropencity to save (APS) , investment , investmnet functions ,Autonomous and Induced Consumption ,Marginal Propensity to Save (MPS)
In 1936, economist John Maynard Keynes published a text that would change the course of economic thought. Titled “The General Theory of Employment, Interest, and Money,” or simply as “The General Theory,”
■it is considered one of the classical works in economics. The book attempted to explain short-term economic fluctuations in general, especially the fluctuations observed during the Great Depression in the early 1930s.
■The main idea put forth by Keynes in The General Theory was that recessions and depressions could occur because of inadequate demand in the market for goods and services.
■The General Theory was intended not just for economists but also for policymakers across the world.
Aggregate Demand
■
Keynes Consumption Function
■ There are several factors determining consumption include income, wealth, expectations about the level and riskiness of future income or wealth, age, education, Preferences and family size.
■According to Keynes, of all the factors it is the current level of income that determines the consumption of an individual and also of society.
■The Keynes’ consumption function can be expressed in the following form: C = a + bYd
■where
C = consumption expenditure
Yd. =The real income
a =The constant parameter which reflects autonomous consumption,
b= The constant parameter which reflects the marginal propensity to consume (
Irving Fisher was first economist to make use of concept MEC
in 1920.
He gave it a name Rate of return over cost.
Simply MEC means “expected rate of profitability of new investment”.
It’s calculation depends upon two factors mainly
amount of profit
cost of capital asset
The fundamental principle of the classical theory is that the economy is self‐regulating. Classical economists maintain that the economy is always capable of achieving the natural level of real GDP, which is the level of real GDP that is obtained when the economy's resources are fully employed.
National output or income was determined by real factors such as capital stock, state of technology, labour supply and in no way was affected by the general price level which was determined by the quantity of money. This classical doctrine is generally referred to as classical dichotomy.
While circumstances arise from time to time that cause the economy to fall below or to exceed the natural level of real GDP, self‐adjustment mechanisms exist within the market system that work to bring the economy back to the natural level of real GDP.
The classical doctrine—that the economy is always at or near the natural level of real GDP (full employment)—is based on two firmly held beliefs:
The assumption of the full employment of labour and other productive resources
Belief that prices, wages, and interest rates are flexible.
The general over production, and hence general unemployment, is impossible.
The normal situation is stable equilibrium at full employment.
The classical economist believe that the policy of laissez-faire guaranteed normal full employment. They had great faith in free and perfect competition, efficacy of the profit motive and price mechanism to remedy the temporary ills of the economic system and ensure full employment.
Prof. Pigou says, “With perfectly free competition, there will always be at work a strong tendency for wage rates to be so related to demand that everybody is employed.”
They treated money as a mere medium of exchange. (Transaction motive)
The classical doctrine—that the economy is always at or near the natural level of real GDP (full employment)—is based on two firmly held beliefs:
The assumption of the full employment of labour and other productive resources
Belief that prices, wages, and interest rates are flexible.
Keynesian Theory
A Study of Short-run Consumption Function and its Modification with Some Spec...iosrjce
Consumption function shows the relationship between a nation’s income and consumption and it is
imperative in macroeconomics. The present study is causal in nature. The study is based on secondary data
sources especially absolute income theory of consumption under the Keynes’s short-run consumption function
and psychological law of consumption. This paper is an endeavor to study the Keynes’s short-run consumption
function (SCFk) with some special assumptions that SCFk
is misleading to formulate the macroeconomic
policies. This study has developed a modified short-run consumption function (SCFm) with some special
assumptions. The SCFm shows that total consumption is lower than the total consumption by SCFk
. So, the
saving derived from SCFm is higher than the saving derived from SCFk
. This study constructs that under some
special assumption, SCFm helps to calculate the exact amount of consumption, saving, investment to formulate
macroeconomic policy (policies) properly which has great impact in macroeconomics.
Keynesian Aggregate demand and aggregate supply income analysisPratikMilanSahoo
This presentation describes the Keynesian model of the economy after the 1929 depression. Aggregate demand aggregate supply with equilibrium and Factors affecting the theory and criticism to Keynesian theory.
Consumption function and investment function chapter 2Nayan Vaghela
Consumption function and investment function chapter 2 SYBcom, Investment Function, Marginal efficiency of capital, marginal propensity to consume, Psychological law of consumption
Here is a recording on key aspects of Keynesian economics applied to current policy issues for the UK and other countries.
An understanding of Keynesian ideas can be helpful in evaluating macroeconomic stability in terms of prices, jobs and incomes.
Keynesians believe that free markets are volatile and not always self-correcting in the event of an external shock
The free-market system is prone to lengthy periods of recession & depression
Economies can remain stuck in an “underemployment” equilibrium
In a world of stagnation or depression, direct state intervention may be essential to restore confidence and lift demand.
Keynes was one of the first economists to criticise the profession for adhering to unrealistic assumptions
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what is the future of Pi Network currency.DOT TECH
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1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
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The U.S. economy is continuing its impressive recovery from the COVID-19 pandemic and not slowing down despite re-occurring bumps. The U.S. savings rate reached its highest ever recorded level at 34% in April 2020 and Americans seem ready to spend. The sectors that had been hurt the most by the pandemic specifically reduced consumer spending, like retail, leisure, hospitality, and travel, are now experiencing massive growth in revenue and job openings.
Could this growth lead to a “Roaring Twenties”? As quickly as the U.S. economy contracted, experiencing a 9.1% drop in economic output relative to the business cycle in Q2 2020, the largest in recorded history, it has rebounded beyond expectations. This surprising growth seems to be fueled by the U.S. government’s aggressive fiscal and monetary policies, and an increase in consumer spending as mobility restrictions are lifted. Unemployment rates between June 2020 and June 2021 decreased by 5.2%, while the demand for labor is increasing, coupled with increasing wages to incentivize Americans to rejoin the labor force. Schools and businesses are expected to fully reopen soon. In parallel, vaccination rates across the country and the world continue to rise, with full vaccination rates of 50% and 14.8% respectively.
However, it is not completely smooth sailing from here. According to M Capital Group, the main risks that threaten the continued growth of the U.S. economy are inflation, unsettled trade relations, and another wave of Covid-19 mutations that could shut down the world again. Have we learned from the past year of COVID-19 and adapted our economy accordingly?
“In order for the U.S. economy to continue growing, whether there is another wave or not, the U.S. needs to focus on diversifying supply chains, supporting business investment, and maintaining consumer spending,” says Grace Feeley, a research analyst at M Capital Group.
While the economic indicators are positive, the risks are coming closer to manifesting and threatening such growth. The new variants spreading throughout the world, Delta, Lambda, and Gamma, are vaccine-resistant and muddy the predictions made about the economy and health of the country. These variants bring back the feeling of uncertainty that has wreaked havoc not only on the stock market but the mindset of people around the world. MCG provides unique insight on how to mitigate these risks to possibly ensure a bright economic future.
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Introduction to Indian Financial System ()Avanish Goel
The financial system of a country is an important tool for economic development of the country, as it helps in creation of wealth by linking savings with investments.
It facilitates the flow of funds form the households (savers) to business firms (investors) to aid in wealth creation and development of both the parties
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2. JOHNMAYNARDKEYNES(1883-1946)
He is an English
Economist, Journalist and
Financier, best known for his
economic theories. He is
widely considered to be one of
the most influential economists
and founder of modern
macroeconomics theory. His
ideas are the basis for the
school of thought of Keynesian
Economics.
2
4. • Employment = Output = Income. As employment increases
output and income increases proportionately.
• Volume of employment depends upon effective demand which
in turn is determined by aggregate supply function and
aggregate demand function.
• Aggregate demand function is governed by consumption
expenditure and investment expenditure.
• Consumption expenditure depends upon size of income and
propensity to consume. It is fairly stable in the short period
because propensity to consume does not change quickly. 4
5. • MEC is based on yield and supply price. Marginal
efficiency of capital(profitability of capital) and ROI
determines Investment expenditure.
• Rate of Interest depends on supply of money(quantity of
money) and demand for money(liquidity preference).
• Transaction, precautionary and speculative motives
determine liquidity preference which along with quantity
of money determines ROI.
5
6. EFFECTIVE DEMAND:
It simply means desire, ability and willingness to buy
i.e., actual expenditure.
Aggregate demand function indicates different amounts
of money which the entrepreneurs expect to get from the sale of
output at varying level of employment.
Aggregate supply function indicates different levels of
income(output and employment) which entrepreneurs will
supply at different levels of expenditure(C+I). The intersection
of ADF and ASF indicates the effective demand.
6
7. CONSUMPTION FUNCTION or PSYCHOLOGICAL
LAW OF CONSUMPTION
Keynes says that psychology of the community is such
that when aggregate real income is increased, aggregate
consumption is also increased but not by so much as
income.
C = f(Y) C = a+bY
This law contains the following propositions:
a. When aggregate income increases, aggregate
consumption also increases, but by a smaller amount.
b. An increment of income will be divided in some ratio
between saving and consumption.
c. Both saving and consumption will increase as a result of
increase in income. 7
8. TECHNICAL ATTRIBUTES
1. Marginal Propensity to Consume(MPC): It refers to the
ratio of a small change in consumption to a small change
in income. MPC indicates the slope of the consumption
curve. MPC=∆C/ ∆Y
2. Marginal Propensity to Save(MPS): It is the ratio of
change in savings to change in income. MPS=∆S/ ∆Y
MPS=∆S/ ∆Y MPC+MPS=1
3. Average Propensity to Consume(APC): It is the ratio of
absolute consumption to absolute income. It tells the level
of consumption at a given level of income.
APC=C/Y 8
9. THE MULTIPLIER
• This concept was initially developed by F.A.Kahn and
later modified by Keynes.
• The size of MPC is key to the size of multiplier.
• Multiplier expresses a quantitative relationship between
aggregate income and the investment.
• It is the ratio of increase in income to the increase in
investment.
k=∆Y/∆I
• Multiplier indicates how many times the income
increases as a result of an initial increase in investment.
• Greater the MPC, higher the rate of investment.
9
10. INVESTMENT FUNCTION
Marginal Efficiency of Capital(MEC) is the expected rate of
return from the employment of a new capital asset and ROI
indicates the cost of investment.
According to Keynes if MEC is greater than ROI, investment
will increase, while decrease if MEC is less than ROI and
investment will stop if MEC is equal to the ROI.
MEC depends on yield from capital asset i.e. returns from output
of the asset and supply price which indicates the cost of
producing the asset.
Thus investment function indicates the relationship between
volume of investment and MEC. It also says that when
investment in capital asset increases, MEC decreases because
yield will fall and supply price increases.
As a whole volume of employment depends on propensity to
consume and inducement to invest.
10
11. THEORY OF INTEREST
ROI depends on quantity of money and liquidity
preference.
Keynes developed monetary theory of interest and said
interest is determined by demand and supply of money.
Demand depends on desire to hold wealth in liquid form
and interest is the reward for parting with it.
The stronger the liquidity preference, higher the ROI and
vice-versa.
Why people want to hold cash????...
1. Transaction Motive
2. Precautionary Motive
3. Speculative Motive 11
12. KEYNES THEORY OF INTEREST
a. Given the liquidity preference , the rate of interest falls as
the supply of money increases and vice-versa.
b. Given the supply of money, the rate of interest rises as
liquidity preference increases and falls as the liquidity
preference decreases.
BUSINESS CYCLE: His theory of employment provides a
general explanation of the cyclical nature of the changes in
employment.
ECONOMIC POLICIES: His theory of employment also
indicated the programme of solving the problem of
unemployment through Taxation Policy, Investment Policy
and Public Investment.
12
13. KEYNESANDMERCANTILISTS
Almost every important idea on which Keynes founded his
theoretical system was present in the earlier literature and
were used by the writers in the past.
Mercantilists were the earlier anticipators of Keynes.
Mercantilists had realized that the economic system did not
automatically bring a state of full employment.
Mercantilists proposed huge spending on luxury goods by the
rich and public works program by state as a means to achieve
full employment.
13
14. KEYNESANDCLASSICALECONOMICS
1. Assumption of full employment:
• Non-existence of involuntary unemployment.
• There is possibility of frictional unemployment and it will
disappear in the long run and tend towards full employment.
Criticisms by Keynes:
• He argued that there is a possibility of underemployment .
• Wages and prices do not adjust each as fast as the classical
economists assumed.
• He concluded that when liquidity preference become perfectly
elastic as a result of investor’s expectation that rate of interest
will not fall further.
• When inevstment function become interest elastic Even though
there is increase in income in price, they will not invest.
14
15. 2. Say’s law of market:
• It says supply creates its own demand.
• When a factor of production is employed, it results in
production of good and generates income. This income is
spent on purchase of other goods.
• The employment of a factor pays its own way.
• It defines that increase in employment, increases income and
this is spent on either consumer goods or investment goods.
Criticism by Keynes:
• Keynes said that a part of increased income is spent on
consumer goods and the other is saved and there is no
guarantee that the saved income will be spent on investment.
15
16. CRITICISMSONKEYNESIANECONOMICS
Pigou Effect: Pigou was the chief defender of neo-classical
economics’. He said that given flexible wages and prices, an
economy does automatically tend towards the full
employment level and this was popularly known as Pigou
Effect’.
No determinate relationship between effective demand and
employment:
There is no direct relationship between ED and level of
employment and said everything depends on
interrelationship between wage rates, prices and money
supply.
Wholly aggregative in nature:
the aggregative concepts do not explain the economic
problems of individual firms, individual consumption etc.
16