Ch.11-14 Notes - CHAPTER 11 Classical - Wealth of Nations...

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

View Full Document Right Arrow Icon
CHAPTER 11 Classical - Wealth of Nations by Adam Smith, 1776 - Markets solve problems of supply and demand - Don’t tinker with the market, “laissez-faire” Say’s Law - The total supply of goods and services in a market economy will equal the total demand from consumption during any given time (supply creates demand) - Households and Firms have a give and take relationship, that balances equally. - Households Firms - Some interpret Say’s Law to mean the economy is always at Full Employment - but many believe though FE is attainable it is not sustainable Great Depression 1929-1930s - GDP - 25% Unemployment - Classical economists thought economy was going to correct itself John Maynard Keynes - Demand creates supply (opposite of Say’s Law) - Advocated use of Fiscal and Monetary Policy to mitigate effects of recessions and depressions - Idea that government should spend money Aggregate Expenditure Model - AE=C+I+G+X - AE, Aggregate Expenditure - C, consumption (the largest portion of the four) - I, Imports - G, Government Spending - X, Net Exports MPC ( Marginal Propensity to Consume) - Equal to a change in consumption, brought by a change in disposable income - MPC= change in consumption ÷ change in disposable income Consumption Income 2001 40,000 45,000 2002 44,000 50,000 - The change in consumption from ‘02 to ‘01 is 44,000-40,000= 4,000 - The change in disposable income from ‘02 to ‘01 is 50,000-45,000= 5,000 - MPC = change in consumption ÷ change in disposable income = 4000 ÷ 5000 = 0.8 - MPC = 0.8 - MPS (Marginal Propensity to Save) = 0.2 - MPS + MPC = 1 (ALWAYS) Consumption Multiplier - Multiplier, the number by which a change in consumption (or investment) is multiplied by to calculate a change in the GDP equilibrium - Multiplier = 1 or 1 1- MPC MPS
Background image of page 1

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

View Full DocumentRight Arrow Icon
- A table of examples: MPC = 4/5 MPS = 1/5 Multiplier = 1/MPS = 5 MPC = 2/3 MPS = 1/3 Multiplier = 1/MPS = 3 MPC = 7/9 MPS = 2/9 Multiplier = 1/MPS = 4.5 - Either MPC or MPS will be given to you. So, if you know MPC is 2/5, to complete that 2/5 you need 3/5 to make 5/5. So MPS is 3/5. Now, Multiplier = 1/MPS = 1/(3/5) = 1.6 Keynesian Equilibrium - The state of the economy when aggregate expenditures equal aggregate demand
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.

Page1 / 7

Ch.11-14 Notes - CHAPTER 11 Classical - Wealth of Nations...

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