The Keynesian Income – Expenditure Model

Topics: Keynesian economics, Macroeconomics, Inflation Pages: 6 (2222 words) Published: April 13, 2011
Question: “The Keynesian income – expenditure model assumes that the macro economy can be fine tuned and controlled in the same way as an engine in a car”. Evaluate the validity of this assertation. The economics is concerned of the production and consumption of goods or services. It also deals with the problem of scarcity. It can be divided into two sections, microeconomics and macroeconomics. The microeconomics deals the demand and supply for the individual part of the economy. The macroeconomics focuses mainly on the concerned economy as an aggregate demand (AD) and aggregate supply (AS). Where the aggregate demand defines the total amount of spending in the economy and aggregate supply means the total national output. There are four major targets for the macroeconomics. They are economic growth, unemployment, inflation, balance of payments and exchange rates. The problems are related with the balance state of aggregate demand (AD) and aggregate supply (AS). Economic growth: All the countries in the world, the governments will try to achieve the higher rates in the economic growth for a longer period of a time. This means that all the governments want a stable growth rather avoiding the recessions and short term growth. The rate of economic growth in the national output normally defined over a period of 12 months (Sloman, J. 2009: 388). The achievement of the long term economic growth depends on the amount of resources available and their productivity. Two policies can be used to reach the higher growth is to focus on the demand side or the supply side and allowing the free market, so that the private sector enterprises can flourish well. Unemployment: The other main macroeconomic target for the government is to reduce the amount of unemployment. Because it shows the amount of human resources wasted and the benefits which they get will be a loss for the government revenues. The number of unemployed can be defined as those of working ages who were without work, but who are available for work at the current wage rates (Sloman, J. 2009: 416). The cause of unemployment divides into two categories such as equilibrium unemployed and disequilibrium unemployed. Inflation: It defines as the rise of prices all over the economy. The governments will try to keep the inflation rate very low and stable. They will try to keep the inflation rate below 3%. It redistributes the income from weak to the powerful. The cause of this will be the decrease in investments. The demand-pull inflation happens when the demand increases and when there is a continuous increase in the costs the cost-pull inflation occurs. Balance of payments and exchange rates: This is concerned with the foreign trade and the country’s relationship with the other nationals. The balance of payments shows all the transactions between the residents in the country and the rest of the world. Any one of the following issues will occur when the country starts to spend more foreign currencies, either the shortage of foreign currencies or the fall of exchange rates. The objectives for the government’s macroeconomics policies are to keep the high economic growth, low unemployment, low inflation rates and the avoidance of the balance of payment deficits and the excessive fluctuations of exchange rates. The way for all this objectives can be related is through the aggregate demand (AD), which has four elements. They are consumer expenditure (C), investment (I), government expenditure (G) and the expenditure of imports (X). The relationship can be defined as AD = C + I + G + X – M, (M is the expenditure on foreign goods and services.) Classical theory for Macroeconomics

The classical theory mainly states that looking on the future prospects equilibrium in the economy will be virtually of no unemployment. The unemployment which will be there are fictional – people will be in the process of changing jobs. There are two main elements in the theory. The free-market economy equals...

References: 1. Sloman, J., Wride A., (2009) 7 edn. Economics. : FT Prentice Hall
3. John B Davis (2010) 'Uncertaininty and Identity: a post Keynesian approach '. Erasmus Journal for Philosophy and Economics 3 (1), 33-49
5. Melmies, J., (2010) 'New Keynesians versus Post Keynesians on the theory of prices '. Journal of Post Keynesian Economics 32 (3), 445
7. Palley, T. I., (2009) 'Imports and the income-expenditure model: implications for fiscal policy and recession fighting '. Journal of Post Keynesian Economics 32 (2), 311-324
9. Monovoisin, V., Phileppe L. (2009) 'Keynes and the real world: Davidson, money, and uncertainty '. Journal of Post Keynesian Economics 32 (1), 43-60
11. Davidson. P., (2009) 'Reply to contributors to the discussion of the central themes of John Maynard Keynes '. Journal of Post Keynesian Economics 32 (1 ), 73 -83
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