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