İKTİSADA GİRİŞ II

If the production factors want to save money rather than spend a portion of their income, then the all return from productions of the firms will not be expended. Therefore, the quantity demanded for goods and services will be lower than the quantity produced. In case of production or supply surplus, firms will decrease their production and start to lay their workers. This means that the economy diverges from the level of full employment.

According to Keynes, equilibrium income can be achieved at the level of underemployment or overemployment. What is important here is the level of aggregate demand.

Equilibrium is the point on which there is no tendency to leave.

Leakages are the factors that cause autonomous components of aggregate expenditures to reduce.

In order to achieve equilibrium in the economy, the leakages from income – expenditure flow must be balanced by additions (i.e., injections) to this flow. There are three types of injections for income- expenditure model developed so far: investments, government expenditures, and exports for an open economy.

If the sum of leakages is equal to the sum of the injections, the GDP will not change and the equilibrium level of GDP will be reached.

When we increase the autonomous expenditures, which vary independently from the income, we can also increase the equilibrium level of GDP. At this point, you can think that the increase in GDP will be equal to the increase in autonomous spending. However, this increase will have more boosting effect than the increase in autonomous expenditure. In other words, the increase in autonomous expenditures creates additional expenditure in the economy, leading to a larger increase in GDP or equilibrium income.

Underemployment Equilibrium Level is the level of equilibrium income in which some of the production factors are idle.

Deflationary Gap is the expenditure gap when the economy is in equilibrium below the full employment level of income.

Aggregate demand is called effective aggregate demand.

It is possible to mention three types of leakages from the income-expenditure flow: savings, taxes and imports for an open economy

In order for the equilibrium to be realized, the sum of the injections must be equal to the sum of the leakages.

In most of the developing countries, households have low level of saving. Contrary, the saving rate  in developed countries is high and, therefore, these savings are used more effectively to finance investment expenditures through well-functioning financial system.

Multiplier analysis tells us that an increase in autonomous spending has boosted the level of equilibrium income.

The determination of economic equilibrium based on aggregate demand or aggregate expenditure in the Keynesian model.

Aggregate supply and aggregate demand are equalized as production = income = spending equality is achieved at all points located on the 45° line we plot as aggregate line.

As the level of income increases, savings, taxes, and imports increase.

Multiplier is a useful tool for assessing the impact of changes in economic policies on the economy.

The Keynesian theory argue that the economy is not always be at full employment equilibrium because flexible prices and wages are not always valid. According to this opinion, there are many factors that prevent wages and prices from being flexible. For this reason, markets are moving away from fully competitive structure. Then (c) is incorrect.

The Keynesian theory argue that the economy is not always be at full employment equilibrium because flexible prices and wages are not always valid. According to this opinion, there are many factors that prevent wages and prices from being flexible. For this reason, markets are moving away from fully competitive structure. In some sectors the existence of firms that do not want to reduce prices may be the case. Prices in these sectors can remain at the same level for a long time instead of falling when there is a fall in demand or expenditure. Because of the existence of strong labor unions and long term wage contracts, the same is also true in labor markets.