Economics For Decision Making 2 Semester 2

2303AFE Economics for Decision Making 2Semester 2, 2015Assignment TopicName26/08/2015PART (A):Keynesian model of based on the ideas of Keynes ashis explanation for the cause of the Great Depression. The basis of the Keynesian theory is that the actions of individuals and firms in an economy when aggregated can lead to macro-economic outcomes. This is because the aggregate income is equal to aggregate expenditures in an economy. This basis is premised on the logic that every individual’s income is an expenditure of another individual CITATION Joh36 \l 7177 (Keynes, 1936). There are two categories of investment. The first category is expenditure for consumption and the other category is expenditure for investment. Thus the equation below can be derivedIncome = consumption + investment When Aggregated for and economy the equation becomesNational Income = aggregate consumption + aggregate investment.Further according to Keynesian theory aggregate consumption is fixed by the consumption habits of the consumers. So if the consumers consume 80 percent of their income the savings are 20 percent and therefore these two factors are passive functions of income. This means both investment and consumption expenditure are determined by income,