Using the Keynesian Income-Expenditure Model Analyze the Impact of the Recent Eurozone Crisis on the Uk Economy

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  • Topic: Economics, Keynesian economics, European Union
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  • Published : January 11, 2013
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USING THE KEYNESIAN INCOME-EXPENDITURE MODEL ANALYZE THE IMPACT OF THE RECENT EUROZONE CRISIS ON THE UK ECONOMY| |
PRINCIPLES OF ECONOMICS (MACROECONOMICS) BMAN10002 COURSEWORK ASSIGNMENT|

|
USING THE KEYNESIAN INCOME-EXPENDITURE MODEL ANALYZE THE IMPACT OF THE RECENT EUROZONE CRISIS ON THE UK ECONOMY| |
PRINCIPLES OF ECONOMICS (MACROECONOMICS) BMAN10002 COURSEWORK ASSIGNMENT|

The Eurozone crisis is a major issue among academia and society, which is having a large impact on the world economy. It was triggered by a sovereign debt crisis, which started in some countries from the periphery of the Eurozone (Portugal, Ireland, Italy, Greece, Spain, also known as PIIGS). This later transmitted to the other members of the monetary union and members of the EU as a whole through financial contagion by trading and banking (Andrews and Parlapiano, 2012). The result is negative consequences to these economies (such as recession, increased unemployment and possibility of default). This essay will attempt to explain the reasons behind this crisis and apply the Keynesian income-expenditure model in analyzing its impact to the UK economy. Finally, it will draw some conclusions and the limitations of the research will be pointed out. The reasons behind the Eurozone crisis are complex and are subject to a thorough research. However, it is widely agreed that it was triggered by the global financial crisis, which started in August 2007 (Soros, 2008). Economists see the globalization of financial markets and easy access to credits and extremely low interest rates as the background of the financial crisis. Those factors contributed to the creation of housing bubbles in the USA and Europe, which later caused a failure in the money markets. (Taylor, 2009). Investing in real estate seemed to be reasonable as prices were going up immensely. These assets soon lost their value, but the liabilities of investors did not decrease, meaning that they were unable to pay their debt. Financial contagion meant that financial institutions along the chain were affected. (Soros, 2008). In attempt to save their banking systems, governments had to increase their debt. Some criticize the EU countries for their aim towards a welfare state and the significant expenditures in the public sector and social services (Carr, 2011). Recently, Stewart (2012) stated that “public sector workforce 'will shrink to record low by 2017'” pointing out that 880,000 public sector jobs might be cut. This is seen as a move away by the government from the welfare state.

The Keynesian income-expenditure model is school of thought, which attempts to explain macroeconomics and gives an alternative to the classical economics school of thought (Parkin, Powel and Matthews, 2006). Keynesians share a view, that some wrong decisions in the private sector may cause macroeconomic failure and therefore interference by the governments and the central banks is needed. This is achieved through effective monetary and fiscal policies. This view was first introduced by John Maynard Keynes as a response to the Great depression of the late 20’s and the 30’s and became largely popular among Western politicians and economist until the 70’s. It benefited from resurgence after the most recent financial crisis. (Reddy, 2009). The Keynesian model proposes a multiplier effect, suggesting that a smaller initial change in autonomous expenditure will lead to a larger increase in the equilibrium planned autonomous expenditure, shifting the curve up or down. Aggregate planned expenditure (AE) is the sum of planned consumption expenditure(C), investment (I), government expenditure (G) and exports(X) minus imports (M).

AE=C+I+G+X-M
In order to analyze the impact of the Eurozone crisis on the UK economy we will examine how each of the variables of the equation has been influenced by it.
The consumption expenditure is vulnerable to changes in the disposable income. The...
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