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1. Specifically, what aspects of Say’s Law
did Keynes criticize and for each point he
criticized, what was his offered solution?
2. How did the Great Depression prove
Say’s Law to be insufficient and Keynes
to be correct? (Be specific)
• Say’s Law Classical Economics
• If You Build It; They Will Come
– Ensure full employment
– Self correcting
– The very act of producing goods generates an
amount of income = to the value of the goods
produced. “Supply Creates Its Own
Demand”
– There will always be sufficient consumption
• Keynes and Aggregate Expenditures
Model
• Not all income will be spent on output
produced
• “underspending”
• Econ. Is unstable, NOT self correcting
• Failure of certain fundamental economic
decisions (saving and investment) to be
synchronized
• ***need govt. deficit spending
• Note:
• The amount of goods and services
produced and therefore the level of
employment depend directly on the level
of total or aggregate expenditures.
(bottom 168)
• Top right 168 Goal
• Analyze the consumption and investment
components (Y=C+I+G+Nx) of aggregate
expenditures and derive a “private sector”
model of EQUILIBRIUM GDP AND
EMPLOYMENT
• SEE pg. 183
• Also note assumptions on 168
– Closed economy
3. Consumption and Savings =
Disposable Income
4. What is significant about the 45’ reference line in
figure 9-1?
Equal distance b/w x, y axis
= amount of consumption or disposable income
= later = GDP and AGG. Expend.
•
•
5. Any space or distance between the
Consumption line and the 45’ line
represents what?
Savings or Dissavings
•
•
•
6. What is dissaving?
C > DI
HOW?
Debt , Liquidation
• APC
• % of any total income which is consumed
• APC = C / DI
• APS
• % of any total income which is saved
• APS = S / DI
7. In table 9-1 and figure 9-2, why is $390 billion
the “break-even income” ?
- C = DI and S = $0
8. As Disposable income increases, what
happens to average propensity to consume?
APC decreases
9. As Disposable income increases, what
happens to average propensity to save?
APS Increases
10. Explain why the answers to 8 and 9
occur.
• As income increases, will have ability
and desire to save more, the % of
income save increases while the % of
income consumed decreases
•
•
11. Explain why APC +APS always = 1.
C + S = DI , then any fraction of C+S = 1
12 Explain MPC and MPS
•
Ratio of CHANGE in consumption or savings in
response to CHANGE in income
•
MPC = Change in C / Change in DI
•
MPS = Change in S / Change in DI
•
•
13. Explain why MPC + MPS always = 1
The fraction of any change in income which is not
consumed then must be saved
14. Develop a theory as to why the U.S. claims the largest APC of any of the
industrialized nations and what this says about our country.