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Case S tudy H omework Questions pg229

Case S tudy H omework Questions pg229. 1. classical argument Prices would fall low enough that people would increase consumption Increase in consumption would lead to increase in employment HOWEVER

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Case S tudy H omework Questions pg229

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  1. Case Study Homework Questions pg229 • 1. classical argument • Prices would fall low enough that people would increase consumption • Increase in consumption would lead to increase in employment HOWEVER • Unemployment was so high during the depression that there was not enough income to stimulate consumption THEREFORE classical assumption that economy would automatically correct itself did not occur

  2. 2. The fundamental error • Change in price of labour leads to a change in the quantity of labour demanded. A decrease in wage rate (because of the decrease in demand for labour) makes labour cheaper than capital goods. • Lowering wages may increase the demand for labour, but it cannot increase the demand by the same amount as the initial decrease.

  3. 3. GDP = C+I+G+ (X-M) • If the C,I,X and M components were all stable at low levels the only component left is G. THEREFORE, • If the government had increased its spending levels, the GDP would have begun to increase.

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  5. John Maynard Keynes Keynesian Economics

  6. Who was he? • English Economist • Born in 1883 • Wrote a book called The General Theory of Employment, Interest and Money during the Great Depression • Founder of Keynesian economics • Wanted the government to intervene to end the Depression

  7. Neoclassical Theory – Pre Keynes • Belief was that economic slowdowns were self correcting. • Problems • Fall in prices • Low interest rates • Decrease in wages and layoffs Corrections -purchasing power increases. -improve return on investment which results in an increase of business investment. -reduce the price of employing labour. Increases the demand for labour

  8. Keynesian Theory • An economic theory stating that active government intervention is the best method of ensuring economic growth and stability. • It is the government's job to smooth out the bumps in business cycles.

  9. - liquidity trap – if interest rates are low people chose to keep their money in the bank instead of investing it. - monetary policy – how much money the bank allows to be printed, controls the supply of money. - purchasing power – the amount of goods a unit of currency can buy - distributive justice – fair allocation of goods and services in society - mulcting – extracting money from someone by fine or taxation - impunity – without punishment • http://www.youtube.com/watch?v=kukKpqd_B2c

  10. Video Questions • Describe Brock • Describe Ronny • What effect did Brock’s spending have on the economy? • What did Brock do to ensure he could continue to spend? • What happened when Brock stopped spending? • In one paragraph describe the concepts that the video is trying to portray. What is the message?

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