Chapter_6 - Chapter 6 The Self Regulating Economy Classical...

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Unformatted text preview: Chapter 6 The Self Regulating Economy Classical Economists and Says Law Says Law : supply creates its own demand. Implied in Says Law: there cannot be either a general overproduction or general underproduction of goods. Says Law still holds in a money economy, where individuals sometimes spend less than their full incomes. This argument was partly based on the assumption of interest rate flexibility. Classical Economist and Interest Rate Flexibility For Says Law to hold in a money economy, funds saved must give rise to an equal amount of funds invested. Interest rates will adjust to equate saving and investment. Any fall in consumption (and consequent rise in saving) will be matched by an equal rise in investment. TE=C+I+G+(EX-IM) S=Yd+C (Income Tax = Consumption + Saving) S (by $100) C (by $100) I (by $100) The Classical View of the Credit Market The Classical View of Says Law in a money economy Classical Economists on Prices and Wages Classical economists believed most, if not all, markets are competitive. Prices and wages will adjust quickly to any surpluses or shortages and equilibrium will be quickly reestablished. Real GDP and Natural Real GDP Three Possibilities a) Recessionary Gap : Real GDP is less than the Natural Real GDP b) Inflationary Gap : Real GDP is Greater than Natural Real GDP c) Long-Run Equilibrium : Real GDP is Equal to Natural Real GDP Real GDP and Natural Real GDP...
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Chapter_6 - Chapter 6 The Self Regulating Economy Classical...

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