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Classical Vs. Keynesian

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Juanita Aguilar

on 23 June 2014

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Transcript of Classical Vs. Keynesian

1. Disagreeing with Say's Law!
Supply doesn't necessarily create its own demand.

Overproduction and underproduction can exist.

"More output may be produced than demanded."

Supply and Demand are not always going to equal each other.

Keynes didn't think added saving would necessarily stimulate an equal amount of added investment. Spending as well as aggregate demand could fall if saving increases.
Keynesian Economics
John Maynard Keynes, an English economist, changed how many economist viewed the economy.

Keynesian period: mid-late 1900's (after Great Depression) until present

Great Depression helped Keynes influence many into thinking like he did.

"Unemployment was sky-high in many countries, and economies had been contracting... Where was Say's Law?"

Keynesians understood their theory might not be right, but had enough evidence to say classical view was wrong.
Disagreeing with it ALL !
"Keynes challenged all four of the classical position beliefs."

1.Say's Law - supply and demand, equal?

wages, prices, and interest rates?

3. A self-regulating economy?

4. laissez- faire?
Classical Economics
4 Main Classical Beliefs
1. Say's law holds...
"Supply creates its own demand."

Say's law implies that there cannot be
1. General overproduction of goods
2. General underproduction of goods

"All out put produced will be demanded."

Consumption spending falls because saving increases---> total spending WILL NOT fall.
Added savings will simply bring ... more investment spending !
A combination of both to an extent!

Both have their own flaws, as they do their advantages.

Neither of the two has been proved to be completely correct. "If there had we wouldn't be talking about both!"

3. Self-Regulating...
2. Wages, Prices and Interest Rates ...
Classical economists argued that saving is matched by an equal amount of investment because of interest rate flexibility.

Amount saved and interest rate are directly related.

Investment amount invested is inversely related to interest rate.

Prices and wages are flexible: they rise and decline in response to shortages and surpluses.

"You save more at higher interest rate, &
You save less at lower interest rate."

" Business invest more at lower interest rates and invest less at higher interest rates."

"Given a surplus in labor market, wage rate will decline, and quantity supplied of labor will equal quantity demanded of it."

"Given a shortage in labor market, wage rates will rise, and quantity supplied will equal the quantity demanded.
3. Economy is NOT Self-Regulating !
Internal structure of economics not always competitive enough to allow prices to fall.

How long wage rate and price level will take to fall is what is put into question!

Keynes believed it took too long for things to regulate on their own, regulation in that case may not be because of mentioned factors.

"Self regulation in long and short periods: unstable economy can exist in recessionary gap."

Things can regulate on their own, but why wait when government can help.
4. Disagreeing with Laissez- Faire
2. Disagreeing with FLEXIBLE prices, wages and interest rates!
Individual save and invest for a host of reasons and no single factor, such as interest rate, links these activities.

Saving and investment depend on a NUMBER of factors, more influential than interest rate, such as a set goal in mind, interest rate increasing just means can reach goal by saving less.

Supply---> is responsive to changes in income than to changes in interest rate

Interest--> more responsive to technological changes, such as business expectations
If business expectations are pessimistic, investment unlikely, regardless of low interest rate and vice-versatille.

Wage rates DON'T fall!!
Employees naturally resist to wage cuts, labor unions may resist them as well.
Labor contracts make adjusting wage rates impossible.
"Wage rates said to be inflexible in downward direction."
Cut to the Chase!
Keynesian economy is:

1. Not moved by Say's Law- supply and
demand do not navigate the way

2. Prices and Wage Rates are inflexible,
savings and investment are not correlated with the two.

3. Economy is
Self-Regulating- well it is
but it takes too long.

4. Government Involvement- Gov. needs to
be involved every step of the way.
Cut to the Chase!
Classical Economy is:

1. Moved by Say's Law, supply and demand.

2. Prices and Wages being flexible
& Savings and Investment being
dependent on interest rate, with the aid of
supply and demand.

3.Economy is Self-Regulating (flexible
prices, wage rates and interest rate assure this is possible.)

4. Laissez- Faire- "NO government stepping
4. Laissez- Faire...
It is the right policy, or correct, for the government to leave things alone, let them take care of themselves.

"Government doesn't need to be involved."
"Just leave it alone!"
"Government needs to be involved
every step of the way!"
By: Juanita Aguilar

History of economics form about 1750 to the early 1900's, (around the Great Depression time frame)

4 Main Classical Beliefs, some credited to J. B. Say

Strong and firm believer of "Self-Regulation"
Laissez- Faire is not the right nor the correct policy.

"Government can help ."

Arnold, Roger. "Classical Macroeconomics and the Self- Regulationg Economy & Keynesian Macroeconomics and Economic Instability: A Critique of the Self-Regulating Economy." Economics. Eleventh Edition ed. Mason: Cengage Learning, 2013. . Print.

Haynes, Aubrey. "Chapter 9: Classical Macroeconomics and the Self-Rgulating Economy." Thursday- 10:00 a.m. Macroeconomics class. Southwest Texas Junior College, Uvalde. 19 June 2014. Class Lecture.
Say's law holds, so that insufficient demand in the economy is unlikely.

Wages, prices, and interest rates are flexible.

The economy is self-regulating.

Laissez-faire is the right and sensible economic policy.
Economy is able to regulate itself without aid or assistance from anyone, including the government, such must be true for labor market as well .

"Economy is Self-Regulating."

Prices, wages and interest rates may adjust because supply and demand allow it too.
Recession To Equilibrium:
surplus of labor, wage rates fall, SRAS shifts to the right.
Inflationary to Equilibrium:
shortage of labor, wage rates rise, SRAS shifts to the left.
Long Run Equilibrium
Because Wages, Price and Interest Rates are flexible this is balanced:
AD or GDP= C+ I+G+NX
Because Wages, Price and Interest Rates are not flexible this is imbalanced:
AD or GDP ≠ C+ I+G+NX
Works Cited
Full transcript