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Economics2
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.
-The marginal propensity to consume is the fraction of any change in disposable income which is spent for consumer goods and is the slope of the consumer schedule; the marginal propensity to save is the fraction of any change in disposable income which is saved and is the slope of the saving schedule.
-A specific investment will be undertake if the expected rate of net profits exceeds the real interest rate.
-The investment demand curve shows the expected rates of net profits for various levels of total investment.
-Total investment is established where the real interest rate and the expected rate of net profits on investment are equal.
-The investment demad curve shifts when changes occur in the costs of capital goods, business taxes, technology, the stock of capital goods on hand, and business expectations.