Economics

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Recommended: Classical and Keynesian economic theories

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CLASSICAL THEORY

-The classical theory of employment is grounded in Say’s Law, the classical interest rate mechanism, and downwardly flexible prices and wages.

-The aggregate supply curve is vertical at the full-employment level of output; the aggregate demand curve is stable if the money supply is constant.

-Government macroeconomic policies are unnecessary and counter-productive; automatic, built-in mechanisms provide for full-employment output.

KEYNESIAN THEORY

-Keynesian analysis unlinks saving and investment plans and discredits downward price-wageflexibility, implying that changes in aggregate spending, output, and employment, are likely.

-The aggregate supply curve is horizontal; the aggregate demand curve is unstable largely because of the volatility of investment.

-Active macroeconomic policies by government are necessary to mitigate recessions or deppressions.

-Say’s Law is the disarming notion that the very act of producing goods generates an amount of income exactly equal to the value of the goods produced.

-Supply creates its own demand.

-Saving would constitute a leakage in the income-expenditure flows and would undermine the ffective operation of Say’s Law.

-Saving is a withdrawal of funds from the income stream which will cause consumption expenditures to fall short of total output.

-Investment spending by businesses is a supplement to the income-expenditure stream which may fill any consumption gaparising from saving.

-Keynesian economics hold that there ar etwo other sources of funds which can be made available in the money market: 1)the accumulated money balances, 2)lending institutions.

-The Keynesian position is that saving and investment plans can be at odds and thereby can result in fluctuations in total output, total income, employment, and the pricelevel.

-The amount of goods and service produced and therefore the level of employment depend directly on the level of total or aggregate expenditures.

-A consumption schedule indicates the various amounts households plan to consume at various possible levels of disposable income which might prevail at some specific point in time.

-Because disposable income equals consumption plus saving (DI=C+S) you need only subtract consumption from disposable income to find the amount saved at each level of DI.

-Break-even income is the level at which households consume their entire income.

-APC= consumption/ income

-APS= saving / income

-APC + APS= 1

-MPC= change in consumption/ change in income

-MPS= change in saving / change in income

-MPC + MPS = 1

-Nonincome determinants of Consumption and Saving are wealth, price level, expectation, consumer indebtedness, taxation.

-Consumption spending and saving both rise when disposable income increases; they fall when disposable income decrases.

-The average propensity to consume is the fraction of any given level of disposable income which is consumed; the average propensity to save is the fraction of any given level of disposable income which is saved.

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