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Say’s Law Classical Economics If You Build It; They Will Come Ensure full employment

1. Specifically, what aspects of Say’s Law did Keynes criticize and for each point he criticized, what was his offered solution? 2. How did the Great Depression prove Say’s Law to be insufficient and Keynes to be correct? (Be specific). Say’s Law Classical Economics

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Say’s Law Classical Economics If You Build It; They Will Come Ensure full employment

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  1. 1. Specifically, what aspects of Say’s Law did Keynes criticize and for each point he criticized, what was his offered solution? 2. How did the Great Depression prove Say’s Law to be insufficient and Keynes to be correct? (Be specific)

  2. Say’s Law Classical Economics • If You Build It; They Will Come • Ensure full employment • Self correcting • The very act of producing goods generates an amount of income = to the value of the goods produced. “Supply Creates Its Own Demand” • There will always be sufficient consumption

  3. Keynes and Aggregate Expenditures Model • Not all income will be spent on output produced • “underspending” • Econ. Is unstable, NOT self correcting • Failure of certain fundamental economic decisions (saving and investment) to be synchronized • ***need govt. deficit spending

  4. Note: • The amount of goods and services produced and therefore the level of employment depend directly on the level of total or aggregate expenditures. (bottom 168)

  5. Top right 168 Goal • Analyze the consumption and investment components (Y=C+I+G+Nx) of aggregate expenditures and derive a “private sector” model of EQUILIBRIUM GDP AND EMPLOYMENT • SEE pg. 183 • Also note assumptions on 168 • Closed economy

  6. 3. Consumption and Savings = Disposable Income 4. What is significant about the 45’ reference line in figure 9-1? Equal distance b/w x, y axis = amount of consumption or disposable income = later = GDP and AGG. Expend.

  7. 5. Any space or distance between the Consumption line and the 45’ line represents what? • Savings or Dissavings • 6. What is dissaving? • C > DI HOW? • Debt , Liquidation

  8. APC • % of any total income which is consumed • APC = C / DI • APS • % of any total income which is saved • APS = S / DI

  9. 7. In table 9-1 and figure 9-2, why is $390 billion the “break-even income” ? • C = DI and S = $0 8. As Disposable income increases, what happens to average propensity to consume? APC decreases 9. As Disposable income increases, what happens to average propensity to save? APS Increases

  10. 10. Explain why the answers to 8 and 9 occur. • As income increases, will have ability and desire to save more, the % of income save increases while the % of income consumed decreases • 11. Explain why APC +APS always = 1. • C + S = DI , then any fraction of C+S = 1

  11. 12 Explain MPC and MPS • Ratio of CHANGE in consumption or savings in response to CHANGE in income • MPC = Change in C / Change in DI • MPS = Change in S / Change in DI • 13. Explain why MPC + MPS always = 1 • The fraction of any change in income which is not consumed then must be saved 14. Develop a theory as to why the U.S. claims the largest APC of any of the industrialized nations and what this says about our country.

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