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Lecture Economics (6/e): Chapter 11 - Stephen L. Slavin

Chapter 11 - Classical and Keynesian economics. This chapter include objectives: Say’s law; classical equilibrium; real balance, interest rate, and foreign exchange effects; aggregate demand; aggregate supply in the long run and short run. | Chapter 11 Classical and Keynesian Economics 11-1 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives Say’s law Classical equilibrium Real balance, interest rate, and foreign exchange effects Aggregate demand Aggregate supply in the long run and short run 11-2 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives The Keynesian critique of the classical system Equilibrium at varying price levels Disequilibrium and equilibrium Keynesian policy prescriptions 11-3 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Part I: The Classical Economic System The centerpiece of classical economics is Say’s law Say’s law states, “Supply creates its own demand” This means that somehow, what we produce – supply – all gets sold 11-4 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Why Does Anybody Work? People work because they want money to buy things People who produce things are paid. They spend this money on what other people produce As long as everyone spends everything that he or she earns, the economy is OK But, the economy begins to have problems when people save part of their incomes People do save, and saving is crucial to economic growth Without saving, we could not have investment – the production of plant, equipment, and inventory 11-5 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Think of production as consisting of two products: consumer goods and invest-ment goods (for now, we’re ignoring government goods) The money spent on consumer goods is designated by the letter C The money spent on investment goods is designated by the letter I Consumer Goods and Investment Goods 11-6 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-7 Consumer Goods and Investment Goods If we think of GDP as total spending, then GDP would be C + I If we think of GDP as income received, then GDP would be C + S Copyright . | Chapter 11 Classical and Keynesian Economics 11-1 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives Say’s law Classical equilibrium Real balance, interest rate, and foreign exchange effects Aggregate demand Aggregate supply in the long run and short run 11-2 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Objectives The Keynesian critique of the classical system Equilibrium at varying price levels Disequilibrium and equilibrium Keynesian policy prescriptions 11-3 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Part I: The Classical Economic System The centerpiece of classical economics is Say’s law Say’s law states, “Supply creates its own demand” This means that somehow, what we produce – supply – all gets sold 11-4 Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Why Does Anybody Work? People work because they want money to buy things People who produce things are