KEYNES THEORY

1. Transaction motive: amount held by us for everyday transactions, keeping cash is

much easier - income is earned at a certain date, but expenditures occur every day -
money kept aside for this purpose is for transactions only.
2. Precautionary motive: to help us face unforeseen circumstances
3. Speculative motive: we hold cash because other assets’ values are falling, money held
to buy bonds – if their expectations come true, the price of bonds will go up and they
will sell to make capital gains, as interest “I” goes down in the future, bond prices go up
and vice versa.

MONETARISTS vs KEYNESIANS

1. Keynesians: in recessions, expansionary fiscal policy (tax revenue & spending of tax
revenue) can stimulate economic activity, higher government spending can help enable
a quicker recovery, it is a mistake to wait for markets to clear
2. Monetarists: fiscal policy causes no long term increase in real output, it is important to
control the money supply to control inflation, they critique the expansionary fiscal
policy because it will cause inflation or “crowding out”- when government spending
fails to increase aggregate demand because higher government spending equals a fall in
private sector spending.

MULTIPLIER

1. The number of times a rise in national income exceeds the rise in injections of demand
that caused it.
2. Multiplier = 1 / (sum of the propensity to save + tax + import)
3. High multiplier value: economy has plenty of spare capacity, tax is low, possibility to
consume any extra income
4. Low multiplier value: economy is close to capacity limits, rising demand causes rising
inflation, higher inflation causes rising interest rates.

CENTRAL BANK functions

- Issue money (notes and coins)

- Ensure stability of banking system

- Monetary policy (Set interest rates)

- Lender of last resort to commercial banks

- Lender of last resort to government

- Target low inflations, growth and unemployment.

BANK OF ENGLAND INDEPENDENCE

- Without independence the functions of the bank would be manipulated to suit individual
governments or political needs
- The more independent banks: the lower levels of inflation – it has more credibility
- It doesn’t serve the interests of a few individuals, but rather the whole nation

GOOD MONEY functions

- Medium of exchange: accepted in all transactions, by all parties, regardless of whether

they desire others’ goods and services
- Store of value: it holds its value over time, it’s more liquid than most other stores of
value because it’s readily accepted and it’s easy to transport.
- Unit of account: common measure of the value of goods and services being exchanged

CONSUMPTION AND SAVINGS

1. Consumption includes expenditure of households on food, rent, medical expenses etc.

2. Savings is an income received by a consumer that is not spent on the output of firms
through consumption expenditure. It is saved for the future.
3. Income= Consumption +Savings
4. Propensity to Consumption (how much income is consumed)
PC = Consumption / Income
Marginal Propensity to Consumption (how consumption changes with changing
income)
MPC = Change in Consumption / Change in Income
For example, if a household earns one extra dollar of disposable income, and the
marginal propensity to consume is 0.65, then of that dollar, the family will spend 65
cents and save 35 cents.
Propensity to Savings (how much income is saved)
PC = Savings / Income
Marginal Propensity to Savings (how savings change with changing income)
MPS = Change in Savings / Change in Income

UK ECONOMY IN BREXIT

- Inflation has risen

- Every sector of the economy in every UK region will be worse off under all Bruit
scenarios
- Losses are expected to be large, tax revenues will be hit (net losses between 20bn and
80bn a year)
- The economy won’t grow faster than 1.5% a year

GDP

- GDP measures the value of what is produced in a country, while GNP measures the
income accruing to UK residents, including net income from overseas.
- The GNP of a country can be taken as an indicator or measure of economic
development. In general, the higher the GNP, the more developed a country is and vice
versa.
- Potential GDP is the level of national output that would be produced if the economy
were operating at its normal capacity and at ‘full-employment’ level. The GDP gap is
the difference between actual GDP and its potential level.

PARADOX OF THRIFT

- Known as paradox of spending: if individuals decide to increase their private savings

rates, it can lead to a fall in consumption and lower output: it can harm the economy and
overall economy in recession.

STANDARD OF LIVING

- The standard of living measures our material welfare. The baseline measure is real
national output per head of population or real GDP per capita or gross national income
per capita

FISCAL POLICY

- The two main instruments of fiscal policy are government expenditures and taxes. The
government collects taxes in order to finance expenditures

BREXIT

- The withdrawal of the UK from the EU based on the referendum where 52%
voted to leave. Hard Brexit (no deal) vs Soft Brexit (free movement)

UNEMPLOYMENT

1. Cyclical: caused by upswings (unemployment goes down) and downswings of

business cycles (unemployment goes up).
2. Frictional: unemployment between jobs, between graduating and finding a job,
between moving places/ having a newborn and getting back to work, it co-exists with
full employment
3. Seasonal: dictated by nature, sowing and harvesting seasons – after the period goes,
the demand for employment drops dramatically
4. Structural: due to lack of skills demanded by the market
LP CURVE

- Liquidity preference curve: total demand for money (summation of transaction,

precautionary, speculative) and it is related to the rate of interest

THE 1944 WHITE PAPER by GC PEDEN

- Says that the government would pull: trade policy, vital for an exporting nation; interest
rates, to keep money at the right price; public investment and tax rates to make good
any shortfalls in business investment or consumer demand;

ANIMAL SPIRITS

- describes the psychological factors that drive investors to take action when faced with
high volatility in the capital markets. If spirits are low, then confidence levels will be
low and vice versa.

COMMERCIAL BANKS

- Commercial banks make money by providing loans and earning interest income from
those loans.
- When people deposit money in the bank, they get interest rates, but it is less than the
rate charged on money they lend.

US ECONOMY

- healthy according to the key economic indicators. The GDP growth rate is expected to
remain between the 2 percent to 3 percent ideal range. Unemployment is forecast to
continue at the natural rate. There isn't too much inflation or deflation.

VENEZUELAN ECONOMY

- world’s worst negative growth rate (-8%), worst inflation rate (482%), unemployment
rate (17%), corrupt country, state of emergency, no food
- has been running through the gold reserves to pay off some debt
RATE OF ECONOMIC GROWTH

1. Government: fiscal (changing spending and taxation) and monetary policy (changing
the interest rate)
2. Firms: expand production or cut back
3. Individuals: saving, investing

LOWER MARGINAL PROPENSITIES

- At low-income levels, an increase in income is likely to see a high marginal propensity

to consume; this is because people on low incomes have many goods/services they need
to buy. However, at higher income levels, people tend to have a greater preference to
save because they have most goods they need already.
- There is a line that comes diagonally out of the origin at an angle of 45 degrees. The
reason why these diagrams have this 45-degree line is that for every point on the line,
the value of whatever is being measured on the x-axis is equal to the value of whatever
is being measured on the y-axis. Savings is equal to zero.

CONSUMPTION AND SAVINGS FUNCTIONS

- An increase in wealth will increase your consumption even at the same income level,
and can be illustrated by an upward shift in both the Consumption Function and the
Savings Function. Obviously, a decrease in wealth will have the opposite effect.
FAMILY EXPENDITURE SURVEY

- collects data about private household expenditure and food consumption in Great
Britain.

AUSTERITY

- involves policies to reduce government spending (or higher taxes) in order to try and
reduce government budget deficits – during a period of weak economic growth.
Austerity policies are often associated with higher unemployment and lower economic
growth.