that is free market will result in a price for every good for which there is

That is free market will result in a price for every

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” (that is, free market) will result in a price for every good for which there is supply and demand. - Says’s law : All that is produced will sell because supply creates its own demand. - This school cannot explain a prolonged depression. Any declines in aggregate demand would be temporary. Austrian school of economic thought: - This school is similar to neoclassical but considers the role of the money supply and government actions. - Government intervention may cause a boom-and-bust cycle. Copyright © 2014 CFA Institute 8
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KEYNESIAN THEORY OF BUSINESS CYCLES In the event of lower aggregate demand, lower wages result in lower spending, hence affecting demand further. Very low interest rates would not stimulate the economy because confidence would be too low. Government should intervene in a crisis, running a deficit. Criticisms of this theory: - Government debt could get out of control. - Expansionary policy may cause the economy to grow too fast, resulting in inflation and other ills. - It takes time for fiscal policies to work, so they may be ill timed for a short- term crisis. Copyright © 2014 CFA Institute 9
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