4

Chapter 9 classical macroeconomics and keynesian aggregate expenditures

1. Key terms – matching and translation.

Read aloud the key term and its definition so that they make up a single sentence. (Remember about the agreement between the subject and the predicate!). Translate the sentences you have arrived at from English into Russian.

1 Classical economics	Annual percentage by which profits will grow if reinvested.
2 Say’s Law	Economy will automatically adjust to full-employment.
3 autonomous expenditures	Borrowing or drawing down savings.
4 induced expenditures	С + I + G + (X-M).
5 marginal propensity to save	Supply creates its own demand.
6 Keynesian Aggregate Expenditures	The change in consumption divided by the change in income.
7 45-degree Keynesian reference line	Related to income.
8 rate of return	Not a function of income.
9 marginal propensity to consume	1-MPC.
10 break-even level of income	Y = С + S.
11 dissaving	The point where S is zero.

2. Text translation.

Translate the text from English into Russian in writing paying particular attention to the translation of the economic terms in bold as well as words and phrases relevant to the subject of the text. Read out your translation in class and introduce the necessary corrections.

Classical macroeconomics and keynesian aggregate expenditures

Chapter Objectives

After you have read and studied this chapter you should be able to explain why classical economists believed the economy would tend to operate at full-employment; describe the major conceptual differences between Classical and Keynesian theory; enumerate the components of Keynesian Aggregate Demand; discuss average and marginal propensities to consume and save; describe the major determinants of consumption and saving; explain the major determinants of investment; and describe how the major components add together to form Keynesian Aggregate Demand.

Chapter Review: Key Points.

1. Classical theory is a conglomeration of the thoughts of many economic thinkers dating back to Adam Smith.

2. Classical economists based their theory on Say’s Law: Supply creates its own demand. Coupled with assumptions that wages, prices, and interest rates are all perfectly flexible, Say's Law quickly drives a market economy towards full employment. All unemployment is considered voluntary – simply a refusal to work at the equilibrium wage. The protracted unemployment of the early 1930s diluted acceptance of classical theory and led to the development of the radically different Keynesian theory.

3. Keynesian analysis focuses on Aggregate Demand. Much of economic capacity was idle during the Great Depression. During a slow recovery from 1933 to 1940, real output expanded by over 60 percent with only slight increases in the price level. Keynesian economics treats Aggregate Supply as flat during a depression so that the price level can be ignored; it focuses primarily on how to maintain Aggregate Demand consistent with full employment.

4. Aggregate Expenditures (AE) encompass total spending on domestic output during a year. Aggregate Expenditures include four components: (a) personal consumption expenditures, (b) gross private domestic investment, (c) government purchases, and (d) net exports of goods and services: AE = C + I+G + (X-M)

5. The single most important determinant of consumer spending is disposable income through its influence on induced consumption. Consumer spending is related directly to disposable income and is a stable component of Aggregate Expenditures. Other important determinants of consumption and saving include (a) wealth and expectations of future income, (b) customary living standards, (c) the sizes and age composition of typical households, (d) consumer goods on hand and household balance sheets, and (e) consumer expectations about prices and product availability. These determine the level of autonomous consumption (C_a).

6. The marginal propensity to consume (mpc) is the change in planned consumption arising from a given small change in disposable income; it tells us how much of an additional dollar of income will be consumed. Similarly, the marginal propensity to save (mps) is how much of an additional dollar in income will be saved, so mpc + mps = 1.

7. Capital investment refers to purchases of new output that can be used in the future to produce other goods and services. The three major components of investment are (a) new business and residential structures, (b) machinery and equipment, and (c) inventory accumulation.

8. Investment is the least stable component of Aggregate Expenditures, fluctuating widely over the course of a business cycle. The most volatile component of investment is inventory accumulation.

9. The primary factors determining the quantity of investment are (a) expected returns from investment, (b) market interest rates, (c) expectations about the business environment, (d) rates of technological change and innovation, (e) the level of existing stocks of business capital relative to total production, and (f) the costs of capital goods. All else equal, changes in items (c) through (f) shift rate of return curves, while changes in interest rates cause movements along an expected rate of return curve. In simple Keynesian models, investment is treated as autonomous (I_a)

10. While government spending is probably influenced by changes in income, it is even more strongly affected by the state of international relations and domestic politics. Thus government spending as a component of Aggregate Expenditures is also treated as autonomous.

11. Exports and imports are reasonably balanced, so net exports (X-M) make a comparatively small contribution to Aggregate Expenditures. Simple Keynesian models treat net exports as autonomous.

3. Vocabulary practice: switching.

Get ready for an oral (written) translation exercise based on the economic terms in bold, as well as other relevant words and phrases from the text.

Колебаться с большим разбросом в течение цикла деловой активности; market interest rates; конъюнктура; returns from investment; темпы (научно)-технического прогресса; existing stocks of business capital; total production; товары производственного назначения; domestic politics; при прочих равных условиях; rate of return; сдвигать кривую, отображающую изменения нормы прибыли; Autonomous Investment (I_a); государственные расходы; voluntary unemployment; работать за уравновешенную зарплату; protracted unemployment; производственные возможности экономических объектов; to be idle; Великая депрессия; slow recovery; накопления; real output; to expand by over 60 percent; не принимать во внимание уровень цен; consumer goods on hand; поддерживать совокупный спрос в соответствии с полной занятостью; consistent with sth; Aggregate Expenditures (Ae); произведенная в стране продукция; personal consumption expenditures; gross private domestic investment; государственные закупки; primary factors; чистый экспорт товаров и услуг; consumer spending; располагаемый доход; induced consumption; сбережение; wealth; ожидание будущего дохода; customary living standards; размер домохозяйства; age composition; действовать при полной занятости; average propensity to consume; потребление и сбережения; marginal propensity to save; мыслитель-экономист; Say’s law; создавать спрос; total spending; допущение; interest rate; to be perfectly flexible; полная занятость; балансовый отчет; Autonomous Consumption (Ca); наличие товара; marginal propensity to consume (mpc); изменения располагаемого дохода; дополнительный доллар дохода; marginal propensity to save (mps); закупки новой продукции; aggregate expenditures; вложения в капитальные активы; принадлежащие предпринимателям здания и сооружения; volatile component; жилые здания и сооружения; машины и оборудование; inventory accumulation; net exports; состояние международных отношений; внутренняя политика; to be reasonably balanced.