Economics Classical Theory 2

Topics: Macroeconomics, Aggregate demand, Inflation Pages: 3 (590 words) Published: June 27, 2010
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...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Economics Theories Classical vs Kenyseian Essay
  • CLASSICAL THEORIES OF ECONOMIC DEVELOPM Essay
  • classical theory Essay
  • Classical Economics Essay
  • Economic Theories of population growth Essay
  • Classical Theory of Employment Essay
  • keynes theory and classical economy Essay
  • Economics Unit 2 Paper 2

Become a StudyMode Member

Sign Up - It's Free