Classical Economists correct answers - Group that from the 1779s up to the great depression dominated economic thinking.
- They believed recessions would naturally cure themselves because the price system would automatically restore to full employment
- The founder was Adam Smith
- Believed in...
ECON 231 Chp 8 || with Errorless Solutions 100%.
Classical Economists correct answers - Group that from the 1779s up to the great depression
dominated economic thinking.
- They believed recessions would naturally cure themselves because the price system would
automatically restore to full employment
- The founder was Adam Smith
- Believed in " laissez faire" which means "leave it alone" and was a theory that our economy
was self regulating & it would correct itself without government intervention
- Believed that forces of supply & demand naturally achieve full employment in the economy
because flexible prices ( including wages & interest rates) in competitive market brings all
markets to full employment equilibrium. After a temporary adjustment period markets always
clear because firms sell all goods & services offered for sale. In short, recessions would naturally
cure themselves because the capitalistic price system would automatically restore full aggregate
demand & supply
- The classical economists believed that a continuing depression is impossible because markets
eliminate persistent shortages or surpluses.
Says Law correct answers - Developed in the early 1800s by Jean Baptist Say.
- Convinced classical economists that a prolonged depression was impossible.
- Theory that states supply creates its own demand.
- Means that long-term underspending is impossible because the production of goods and
services (supply) generates an equal amount of total spending (demand) for these goods and
services.
Conclusion: In the classical view, unemployment is the result of a short-lived adjustment period
in which wages and prices decline or people voluntarily choose not to work. Thus, there is a
natural tendency for the economy to restore full employment over time.
The General Theory of Employment, Interest & Money correct answers - A Cambridge
University economist named Keynes write in a great time of uncertainty & instability. His book
established macroeconomics as a separate field of economics & challenged the baffled classical
economists by turning Says Law upside down.
- Argues that demand creates its own supply
- Keynes explained aggregate expenditures (demand) can be forever inadequate for an economy
to achieve full employment
- Aggregate expenditures are the sum of consumption (C), investment (I), government spending
(G) & net exports (X-M)
Aggregate Expenditures correct answers - Aggregate expenditures are the sum of consumption
(C), investment (I), government spending (G) & net exports (X-M)
- Also known as aggregate spending aggregate demand & total spending
Consumption Function correct answers - Graph or table that shows the amount households spend
for goods & services at different levels of real disposable income
- Shows the amount households spend for goods & services at different levels of disposable
income
, Conclusion: There is a direct relationship between changes in real disposable income and
changes in consumption spending.
Conclusion: A change in real disposable income is the sole cause of a movement along the
consumption function. A shift or relocation in the consumption schedule occurs when a factor
other than real disposable income changes
Disposable Income Keynes correct answers - According to Keynes the most important factor is
disposable income ( personal income to spend after taxes)
- Keynes argued that it is a fundamental psychological law that if take home pay increases,
consumers will increase their spending & saving
- Keynes focus on the relationship between consumption & real disposable income is represented
by the consumption function
Savings Formula correct answers S= Yd - C which leads to
Yd = C + S
- Note that if real disposable income was $0, consumption expenditures will be $1 trillion of
autonomous consumption
Autonomous Consumption correct answers - Consumption spending that is independent of the
level of real disposable income.
- It is the amount of consumption expenditures that occur even when real disposable income is 0
- At other low levels of real disposable income, households also spend more on consumer goods
& services then they earn in income during the year.
- If annual real disposable income is any level below $4 trillion, households dissave
Dissaving correct answers - Amount by which real personal consumption expenditures exceed
real disposable income.
- Negative saving (dissaving) is financed by drawing down previously accumulated financial
assets such as savings accounts, stocks, bonds or borrowings.
- Example: At a real disposable income of $2 trillion per year, families spend $2.5 trillion nd
thereby dissave $0.5 trillion
45 Degree Line correct answers - Geometric construct that represents all points where the value
measured on the vertical axis equals the value measured on a horizontal axis. This makes it
easier to identify the breakeven (no saving income) which equates real disposable income
measured on the horizontal axis & consumption measured on the vertical axis.
Saving correct answers - Amount by which real disposable income exceeds real personal
consumption expenditures.
- Savings can be in various forms such as a savings account, certificate of deposit, stocks or
bonds.
- Formula: real disposable income - consumption
Marginal Propensities to Consume & Save correct answers - The change or "extra" in
consumption resulting from a given change in real disposable income
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