Keynesian Demand-Side Economics

1. Keynesian Demand-Side Economics “Demand creates its own Supply”

2. DEMAND SIDEEconomics • 1960’s- 1970’s • Consumer Based • Keynesian Economics • John Maynard Keynes • Government tries to influence Gross Domestic Production by changing the Aggregate Demand • Goal is to promote full employment

3. A/an _________ makes purchases of goods and services for personal use. • Producer • Economist • Consumer • manufacturer

4. "The role of people is to keep ideas alive until a-crisis occurs.” Crisis Occurs - Great Depression Classical Economists: in a recession, wages and prices would decline to restore full employment Government would spend and decrease taxes when private spending was insufficient and threatened a recession Keynes Argues: Falling prices and wages, by depressing people's incomes, would prevent a revival of spending Government would reduce spending and increase taxes when private spending was too great and threatened inflation

5. Theory Direct determinant of output, investment, employment, is amount of money being spent, or aggregate demand. The more people spend, the more people are employed and the more output is produced.

6. One of the results of the decrease in consumer spending is the: • decrease in savings. • downward trend in the economy. • rise in housing costs. • advertising.

7. Government Actions(Demand Side) • Increase Government Spending • Stimulus Package • Tax Rebate • “Cash for Clunkers” • Taxes Increase (especially for businesses)

8. Focus on demand side Aggregate Demand (AD) management • Aggregate demand is the total demand in an economy for all the goods and services produced

9. How to increase AD Increase government spending • government spends more to replace the missing private investment with public investment, financed by deliberate deficits • government spending and taxing to stabilize the economy.

10. How to increase AD Increase C (consumption & consumer sovereignty) Government intervention through fiscal and monetary policies may be desirable to stabilize the business cycle (the ups and downs in the economy) • decrease taxes (fiscal policy) • increase money supply (monetary policy)

11. The amount and type of goods that the consumer purchases depends largely on: • product improvement. • advertising. • ability to pay. • credit bureaus.

12. DEMAND FOR INVESTMENT SPENDING IS DRIVEN BY BUSINESS EXPECTATIONS OF PROFITABILITY.

13. Supply or Demand side expansion? P If the recovery was supply-driven, then there should be an increase in output with steady or falling prices. AS1 AS2 P*1 P*2 AD1 0 Y Ye*s Ye*1

14. Supply or Demand side expansion? P If the expansion was demand-driven, output and prices would both rise. AS1 P*2 P*1 AD2 AD1 0 Y Ye*s Ye*1

15. Aggregate demand determines the volume of goods that firms sell. - increases production - increases job creation - increases consumer spending

16. In the American economy, consumers play an important role because: • by buying products they are directing production. • they are the smallest part of the population. • they elect government planners. • they purchase products on credit.

17. As total consumer income increases: • demand decreases. • demand remains constant. • demand increases. • price decreases.

18. Which of the following situations demonstrates the idea of consumer sovereignty? • Mike makes wood carvings because people will buy them. • Ann bakes cake for her family every Saturday. • Mike draws pictures because he enjoys doing it. • Matt cuts his grass every week so it doesn't get too tall.