TOPIC I: Classical and Keynesian Theories of National Income
OBJECTIVES:
compare and contrast the classical and Keynesian theories of national
income determination.
use the Aggregate Demand and Aggregate Supply (AD/AS) model to explain the
changes in national income and employment given novel changes in aggregate
demand.
explain how investment and savings stabilize the national economy.
explain Say's law.
identify Keynes's criticism of the classical AS/AD model?
KNOW THE FOLLOWING TERMS
Keynesian Theory
Classical Theory
Say's Law
Multiplier effect
Marginal Propensity to Consume (MPC)
KEY CONCEPTUAL QUESTIONS
Why did classical economists think that flexible prices would prevent
lasting depressions? (i.e., Assume a leftward shift in aggregate demand and
indicate what would happen to employment, national income, and prices).
How do planned investment and saving respond to changes in the interest
rates? Why does the interest rate represent the opportunity cost of investment
even when a firm is able to finance an investment project from its own
profits?