Economics :: essays papers

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.