Question

4.   In the Keynesian system, what forces operate to restore GDP to its equilibrium value if disequilibrium prevails?

5.   Explain Keynes’ theory of the consumption function. What implications does the value of the marginal propensity to consume have for the relationship between the amount of savings and the level of income?

6.   Why, in the Keynesian system, might the level of equilibrium GDP fail to coincide with the level of GDP that ensures full employment in the labor market?

Answer 1

1) In the Keynesian system, what forces operate to restore GDP to its equilibrium value if disequilibrium prevails?

Answer: In the Keynesian system when disequilibrium prevails it is restored by aggregate demand and aggregate supply

2) Explain Keynes’ theory of the consumption function. What implications does the value of the marginal propensity to consume have for the relationship between the amount of savings and the level of income?

Answer: The Keynesian consumption function, displays the functional relationship among total consumption and gross national income. The Keynesian consumption function expresses the level of consumer spending that depends mainly on three factors -disposable income (Yd), autonomous consumption (a), and marginal prosperity to consume (b); and can be expressed as: C = a + b Yd

The formula states that as income increases, consumer spending will also increase, thus MPC will also increase and MPS will decrease. However, spending will rise at a lower rate than income

3) Why, in the Keynesian system, might the level of equilibrium GDP fail to coincide with the level of GDP that ensures full employment in the labor market?

Answer: The market itself is not efficient to generate sufficient savings to sustain the investment at the levels of full employment, thus this mostly occurs in the labor market at expense wages