Econ 211 Essay

824 WordsJan 6, 20154 Pages
1. What shape did the short-run aggregate supply curve have during the 1930s, according to Keynes? Explain. (5 points) During the 1930’s the short-run aggregate supply curve was “nearly horizontal” (Miller, 2012, pg. 236). The GDP was estimated to have changed by around 8 percent between 1934 and 1940. In comparison, in 2005 the real GDP was measured between $0.7 trillion and close to $1.1 trillion a change of around 50 percent. The aggregate supply curve in the 1930’s is also known as the Keynesian short-run aggregate supply curve. This is the “horizontal portion of the aggregate supply curve in which there is excessive unemployment and unused capacity in the economy” (Miller, 2012, pg. 236). Reference Miller, R. (2012). Economics Today: The Macro View, A Custom Edition (16th ed.). Boston,MA: Addison-Wesley/Pearson. 2. What is the multiplier? How is it calculated? Why is the multiplier related only to consumption spending? (5 points) The multiplier is “the number by which a permanent change in autonomous real investment or autonomous real consumption is multiplied to get the change in the equilibrium level of real GDP” (Miller, 2012, pg. 265). An increase in the real investment or in components of consumption will cause a rise in the real GDP and a decrease in real spending will cause a decrease in the real GDP. To calculate the multiplier one takes 1 and divides it by 1 minus the marginal propensity to consume, which is equal to one divided by the marginal propensity to save. Therefore, the “smaller the marginal propensity to save, the larger the multiplier” and the “larger the marginal propensity to consume, the larger the multiplier” (Miller, 2012, pg. 266). The multiplier is not solely related to consumption, but is also related to withdrawal, tax, import, and saving. It is also affected by “space capacity if the economy is close to fully

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