Topic Classical Keynesian
Modern followers - Adam Smith -J.M Keynes
-J.B Say
-David Ricardo
-Alfred Marshall
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Say's Law -supply creates its own demand -depression refuit Say's Law
-production= income= spending -demand creates its own supply
-under spending is unlikely -under spending persist
-whatever output that is production will be demanded
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Savings and -Savings=Investment Income Saving does not equal investment
Investments Savings(leakage)=investment Different Motivations
(injection) Savings Motivations
-future needs -interest rates
-precaution -rate of profit
expectations
-habit
-income level
1965 -interest rate
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Lonable Funds Market -investment from savings, cash,
checking accounts
Ig=gross investment -lending creates money which
r=real interest rate causes supply of money to
sm= supply of money increase (-->sm ^)
-inflation and unemployment
are unstable
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Wage/price flexibility -prices and wages are -prices and wages are inflexible
flexible downward downward(ratchet effect)
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Supply Curve -vertical line -horizontal line
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Output and Employment -AS determines output and -AD determines output and employment employment
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Unemployment -rarely exists due to wage/ -usually exists with
price flexibility +external (war)
s=saving -cause:external (war) +internal
i=investment (s does not equal i)
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Aggregate Demand (AD) -AD determines the price -AD changes due to the
level determinate
-AD reasonably stabled if -AD is unstable even if money
money supply is stabled supply is stabled due to fluctuation
in investment spending
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Basic equation MV=PQ (1965-1972) C+Ig+g+Xn=GDP
(1973-present)
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Role of Government -monitory rules -believed in fiscal policy
-maintain a steady money supply (tax and spend)
-Laiz Fairs is best -believe in an active government
-economy is self regulating -economy is not self regulating
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Inflation -caused by too much money -caused by too much demand
% Change in PL^
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How long the short -short time -very long time
run is
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Emphasis Today -microeconomics -macroeconomics
Another difference between the two is that classical was before the great depression and keynesian is after. In classical, they believe that it is always full employment
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