202-T&C-6(2) - Econ 202 Terms and Concepts 6 THE...

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Econ 202: Terms and Concepts 6: THE NATIONAL INCOME IDENTITY and THE CONSUMPTION FUNCTION Recall from our first look at Business Cycles that these began to appear in the economy during the industrial revolution. In the United States there were serious recessions (negative growth) after roughly every two to four years of positive growth, and several deep and long depressions (decline of output greater than 10%) and recurring bank panics. During this period our First National Bank (1791-1811) and Second National Bank (1813-1836) were created and then shuttered, and in 1913 our Federal Reserve Act was passed, creating the Federal Reserve Bank that began operation in 1916 and still exists today. But a theoretical model of equilibrium in the national economy did not appear until 1936, with the publication of the General Theory of Employment, Interest, and Money by John Maynard Keynes. What Lord Keynes did was to pull together into a coherent and powerful explanatory theory the observations of economists who had gone before him. Instead of markets that are equilibrated by changes in product and resource prices, Keynes presented a national economy that is equilibrated by changes in income. When expenditures decline, incomes also decline and the economy moves into a downturn. The sum of all demand in the economy, called Aggregate Demand , is what calls forth supply into being. Aggregate Supply , the sum of all supply, adjusts to the level of Aggregate Demand. The equality that matters, then, is the equality between Incomes and Expenditures, which we call today the National Income Identity . 1797 Bank Panic 1893 Bank Panic 1807 Depression 1896 Bank Panic 1873-1879 Depression 1907 Bank Panic 1815-1821 Depression 1910-1911 Bank Panic 1839-1843 Recession 1920-1921 Depression 1857 Bank Panic 1929-1938 Great Depression 1797 Bank Panic 1893 Bank Panic 1807 Depression 1896 Bank Panic 1873-1879 Depression 1907
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