Worksheet3.Classical Model.consumption.doc

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University of Massachusetts Amherst
ECON 104
Valerie Voorheiis

Michael Favorito Introduction to Macroeconomics, Econ 104a,c,d- Spring 2012 Worksheet 3– Classical Model, Keynesian Consumption due 2/17 in Discussion Section or uploaded to moodle 1. What was the Classical Model answer to the Great Depression? Classical theory still insisted unemployment was voluntary or temporary; wages would fall and things would recover. But in reality, as wages dropped, employment fell. 2. Who is John Maynard Keynes? John Maynard Keynes was a British economist who published The General Theory of Employment, Interest, and Money in 1936. He focused on unemployment and reality. He is considered one of the founders of modern macroeconomics. 3. What is equilibrium to Classical Economists? What is different about it for Keynes? Equilibrium- wages, interest rates and prices adjust so that the equality demanded equals the quantity supplied. Aggregated Expenditures equal aggregated output. Classical: equiliubrium is full employment Keynes: equilibrium might, might not be full employment, no autopilot, invisible hand 4. What are Leakages and Injections…why are they important to Keynes? Leakages are income not spent; savings, taxes, and imports. Transfers of funds out of the income and spending flows. Injections are spending from “borrowing” government spending, investment, and exports. Additions of funds to the spending flows. They are important to Keynes because in order for there to be equilibrium, leakages must equal injections. According to Keynes, the equilibrium depend on the amount of spending
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