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Ebook Macroeconomics (9E): Part 2

(BQ) Part 2 book "Macroeconomics" has contents: Classical and keynesian economics, fiscal policy and the national debt, fiscal policy and the national debt, the federal reserve and monetary policy, economic growth and productivity, income distribution and poverty, international trade, international finance,.and other contents. | sLa75799_ch11_251-274.indd Page 251 4/18/08 12:53:23 PM user-s206 /Users/user-s206/Desktop/Tempwork/Anita_backup/APRIL/18:04:08/MHBR019 www.downloadslide.com Chapter 11 Classical and Keynesian Economics T he first commandment of medicine is, “Do no harm.” Until the Great Depression, the even stricter first commandment of economics was, “Do nothing.” The workings of the price system would ensure that our economy be at, or moving toward, full employment. In the immortal words of Thomas Jefferson, “The government that governs least, governs best.” But as the depression got worse, it became clear that the government needed to take very decisive measures to get the economy moving again. John Maynard Keynes outlined just what measures were needed. This chapter is divided into three parts: (1) the classical economic system, (2) the Keynesian critique of the classical system, and (3) the Keynesian system. The basic difference between Keynes and the classicals is whether our economy tends toward full employment. LEARNING OBJECTIVES In this chapter we shall take up: 1. Say’s law. 2. Classical equilibrium. 3. Real balance, interest rate, and foreign purchases effects. 4. Aggregate supply and aggregate demand. 5. The Keynesian critique of the classical system. 6. Disequilibrium and equilibrium. 7. Keynesian policy prescriptions. Jean Baptiste Say, French economist and entrepreneur Part I: The Classical Economic System Say’s Law The centerpiece of classical economics is Say’s law. Named for Jean Baptiste Say, a late-18th-century (the late 1700s) French economist, the law stated, “Supply creates its own demand.” Think about it. Somehow what we produce—supply—all gets sold. A few years later the great English economist David Ricardo elaborated on Say’s law: No man produces but with a view to consume or sell, and he never sells but with an intention to purchase some other commodity which may be immediately useful to him or which may contribute to future production. By .