CH11-keynesianmacroeconomics - CH 11- KEYNESIAN FOUNDATIONS...

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CH 11- KEYNESIAN FOUNDATIONS OF MACROECONOMICS What did Classical economists say about behavior of economy and how was Keynes different from them? Classical economists believed in Says Law that supply creates its own demand – this means that supply cannot exceed demand or overproduction of goods and services relative to demand is not possible. The implication is that recessions (deficient demand) and inflationary gaps (excess demand) are not possible. What is the logic of Says law? A producer (firm or farmer) will gauge demand and produce accordingly, which will generate some income for him, this income becomes the constraint on the total demand in the economy. Producers could over or under produce if they misjudge demand. Prices of goods in excess demand would rise and prices of products in excess supply would fall restoring market equilibrium. Deficient demand (or recessions in the economy) could never occur because production of goods generates the commensurate income and hence the demand that would be just sufficient to equal the supply of goods that were produced. Classical economists believe that the economy will always be in equilibrium (if not, it will quickly revert to it) (i) Firstly, due to operation of Says law (ii) Secondly, if there are inequalities of demand and supply these will be quickly corrected because of adjustment of wages and prices. The classical view of a full employment economy was fairly reasonable before the Great
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This note was uploaded on 11/22/2009 for the course HR GM600 taught by Professor Na during the Spring '09 term at Keller Graduate School of Management.

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CH11-keynesianmacroeconomics - CH 11- KEYNESIAN FOUNDATIONS...

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