Economics Classical Theory

The classical theory of employment is grounded in Says Law, the classical interest rate mechanism, and downwardly flexible prices and wages. -The aggregate supply curve is vertical at the full-employment level of output; the aggregate demand curve is stable if the money supply is constant. -Government macroeconomic policies are unnecessary and counter-productive; automatic, built-in mechanisms provide for full-employment output.

Keynesian analysis unlinks saving and investment plans and discredits downward price-weightlifting, implying that changes in aggregate spending, output, and employment, are likely. -The aggregate supply curve is horizontal; the aggregate demand curve is unstable largely because of the volatility of investment. -Active macroeconomic policies by government are necessary to mitigate recessions or depressions. -Says Law is the disarming notion that the very act of producing goods generates an amount of income exactly equal to the value of the goods produced. Supply creates its own demand. -Saving would constitute a leakage in the income-expenditure flows and would undermine the effective operation of Says Law. -Saving is a withdrawal of funds from the income stream which will cause institution expenditures to fall short of total output. -Investment spending by businesses is a supplement to the income-expenditure stream which may fill any consumption spraining from

saving. -Keynesian economics hold that there ar two other sources of funds which can be made available in the money market: l)the accumulated money balances, 2)lending institutions.

Economics Classical Theory 2 By denote thereby can result in fluctuations in total output, total income, employment, and the priceless. -The amount of goods and service produced and therefore the level of employment upend directly on the level of total or aggregate expenditures. -A consumption schedule indicates the various amounts households plan to consume at various possible levels of disposable income which might prevail at some specific point in time. -Because disposable income equals consumption plus saving (DID=C+S)