What are the effects of the following events on the Aggregate Expenditures and income in the Keynesian model?a)      The fraction of the...

What are the effects of the following events on the Aggregate Expenditures and income in the Keynesian model?

a)      The fraction of the income spent on imports rises.

b)      Business confidence recovers.

c)      Marginal tax rate falls.

Expert Answers
pohnpei397 eNotes educator| Certified Educator

In essence, what you are asking here is what sorts of things affect aggregate demand/expenditures in the Keynesian model.

The Keynesian model says that aggregate expenditures (and therefore national income) are made up of four parts.  These parts are consumer spending, government spending, business investment, and net exports.  Three of these are represented in your question.

When people spend a greater percentage of their income on imports, net exports decrease because more money is spent on imports than previously.  Therefore, aggregate expenditures decline.  The other two factors cause aggregate expenditures to rise.  When businesses are more confident, they are more likely to invest (which means to purchase capital goods).  They feel that the economy will do well, so they are willing to buy more so as to expand their businesses.  When marginal tax rates fall, people have more money to spend.  This is important to the economy because consumer spending (usually called consumption) makes up the largest part of aggregate expenditures in most economies.  When people spend more, consumption increases, thus increasing aggregate expenditures.

Thus, the first factor you mention in this question will decrease aggregate expenditures in the Keynesian model but the other two factors will increase it.

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