Transcript Keynes and the Classical theory

Keynes and the Classical theory
• In the 1930s, wage rates fell and
employment did not increase as classical
model predicted.
Keynes and the Classical theory
•
In the 1930s, wage rates fell and employment did not increase as classical
.
• Real wages do not fall as quickly and
significantly to solve unemployment
problem as classical model suggest.
model predicted
Keynes and the Classical theory
Money and financial Markets
• According to the classical model, increase
in the money supply will increase aggregate
demand for goods and services directly.
Keynes and the Classical theory
Money and financial Markets
•
According to the classical model, increase in the money supply will increase
Keynes argued
that classical economists overstated the
impact of the money supply on the
economy. He argued that
aggregate demand for goods and services directly.
Keynes and the Classical theory
He Money and financial Markets
•
According to the classical model, increase in the money supply will increase
aggregate demand for goods and services directly. Keynes argued that
classical economists overstated the impact of the money supply on the
He argued that money is one of assets
that households keep. A change in the
money supply disturbs their equilibrium and
therefore they have to re-allocate their
assets, including money holdings.
economy.
Keynes and the Classical theory
He Money and financial Markets
•
According to the classical model, increase in the money supply will increase
aggregate demand for goods and services directly. Keynes argued that
classical economists overstated the impact of the money supply on the
economy. He argued that money is one of assets that households keep. A
change in the money supply disturbs their equilibrium and therefore they have
This means
demand for money must depend on the rate
of interest.
to re-allocate their assets, including money holdings.