CHAPTER 9 - CHAPTER 9-2/20/08 The classical model: If left...

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CHAPTER 9-2/20/08 The classical model: If left to its own devices, a free-market economy is self-correcting. Ex: if planned investment decreases, consumption goes up and replaces investment spending. How? INTEREST RATES fall (and then investment will pick up a bit, but consumption is still higher. Investment spending goes down, we are still at full employment. Demand for loans curve shifts to the left. Interest rate falls; equilibrium consumption will be higher in the new loans market. Consumption – (-I), consumption is still higher. One part of spending goes down, the other one will go up as an adjustment in the classical loans market. Chapter 9 Conclusion of classical model: The classical model cannot explain short run fluctuations in output and employment “Until the great depression of the 1930s, there was little reason to questions this classical ideas….But during the great depression, output was stuck far below its potential for many years.” Keynes: (”canes”)
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CHAPTER 9 - CHAPTER 9-2/20/08 The classical model: If left...

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