Chapter-7 - CHAPTER 7 Economic Instability: A Critique of...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 7 Economic Instability: A Critique of the Self-Regulating Economy Chapter 6 introduced the idea of the self-regulating economy. According to Classical economists, the economy can move back to its long-run equilibrium without direct government intervention in the market. Some economists take the opposite point of view: the economy is inherently unstable and not self-regulating. Chapter 7 looks at the Keynesian approach to the economy . The chapter both critiques the concept of the self-regulating economy and introduces the simple Keynesian model and the concepts of the consumption function , the marginal propensity to consume and save , and the multiplier . The simple Keynesian model is analyzed both in terms of the aggregate demand and aggregate supply framework, and in terms of the total expenditure-total production framework to explain how the economy adjusts to disequilibrium and why the economy may be unable to get out of a recessionary gap by itself. KEY IDEAS 1. John Maynard Keynes challenged all four of the beliefs on which the classical position of the economy was based, concluding that the economy could get stuck in a recessionary gap. 2. The simple Keynesian model is a prominent macroeconomics model. 3. The simple Keynesian model can be analyzed in terms of the aggregate demand and aggregate supply framework, and can be used to show why Keynes believed that government has an economic role to play. 4. The simple Keynesian model can be analyzed in terms of the TE=TP framework, and can be used to show why Keynes believed that government has an economic role to play. CHAPTER OUTLINE I. QUESTIONING THE CLASSICAL POSITION John Maynard Keynes, the English economist, challenged all four of the beliefs on which the classical position of the economy was based. A. Keynes’s Criticism of Say’s Law in a Money Economy Keynes believed that Say’s law might not hold in a money economy. He believed that an increase in savings might not be matched by an equal increase in investment, since both saving and investment depend on a number of factors that may be far more influential than the interest rate. In this event, more output may be produced than will be demanded. 110
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
111 Chapter 7 B. Keynes on Wage Rates Keynes believed that wage rates may be inflexible in a downward direction if employees and labor unions resist wage cuts, and that this inflexibility means that the economy may not be self-regulating. C.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/28/2010 for the course ECON 201 taught by Professor Dr.sharma during the Spring '08 term at Ohio State.

Page1 / 6

Chapter-7 - CHAPTER 7 Economic Instability: A Critique of...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online