Homework Essay

Chapter 18 p534 1.What is the key assumption of the basic Keynesian model? excuse why this assumption is needed if one is to accept the view that store up outlay is a driving force behind short-term economic fluctuations.The Keynesian model shows how fluctuations in think aggregate expenditure force out cause actual output to differ from potential output. This method is inevitable because if it were not used companies would have to change prices every time in that respect was a possible change in demand or beat shift in inventory. With this method short term economic f small can happen when the a keep company does shift their price to adopt demand.3. Define planned aggregate expenditure and list its components. Why does planned spending change when output changes relatively infrequently. What accounts for the difference?This is a quantity planned spending on goods and services including consumption, investment, government purchases and net ports. If spending change happen s infrequently then added goods go into inventory causing company to spend capital on invested inventory. Consumption function accounts for the difference amid changes in expenditure.Chapter 191. Why does the real interest rate accept planned aggregate expenditure? Give examples.Because the raising or bring down scratchs the cost of borrowing, which affects consumption and planned investment (which all is a dower of aggregate expenditure). If the Fed domiciliates rates the housing market will black down buying. If the Fed lowers rates more people are in all probability to buy homes and refinance.2. The Fed faces a recessionary gap. How would you expect it to respond? let off step by step how its policy change is likely to affect the economy.The Feds position is to eliminate output gaps and maintain low inflation. To eliminate a recessionary output gap, the Fed will raise the real interest rate.