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Keynes Thought That the Behaviour of the Economy in the Short

question 5

Essay

Keynes thought that the behaviour of the economy in the short run was influenced by what he called "animal spirits." By this he meant that business people sometimes felt good about the economy, and carried out lots of investment, and at other times felt bad about the economy, and so cut back on their investment spending. Explain how such fluctuations in investment would lead to fluctuations in real GDP and prices.


Definitions:

Invested Assets

Invested assets refer to the total of all investments held by an individual or institution, including stocks, bonds, real estate, and other financial assets.

Return On Investment

A measure used to evaluate the efficiency or profitability of an investment, calculated by dividing the net profit from the investment by its original cost.

Divisional Performance

Assessment of the financial and operational effectiveness of a distinct business unit within a larger corporation, often reviewed to make strategic improvements.

Profit Margin Component

An element of profitability that shows the relationship between a company's profits and its sales or revenue.

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