Answer to Question #224724 in Macroeconomics for Lisa

Question

We call the model of income determination developed in this chapter a Keynesian one. What
makes it Keynesian, as opposed to classical?

Answer 1

The Keynesian model of income determination in a two sector economy looks at two approaches of income determination and output. That's aggregate demand and aggregate supply method and saving investment method. According to Keynesian model the equilibrium level of national income is determined at a point where the AD curve intersects the aggregate supply curve. According to Keynes the level of national income in the short run is determined at a point where intended or planned saving is equal to planned or intended investment.

On the other side in classical model, rate of interest is the equilibrating force between saving and investment. As opposed to classics model that believes that supply creates it's own demand. It states that it is automatic mechanism that establishes equilibrium between AD and AS.

Classical model saving is a positive function of a real interest rate and investment is a negative function of a real interest rate. Great depression of 1930 provides Keynes sufficient profit that an economy is not self adjusting:that full employment equilibrium with not be automatically achieved in the short run.