Answer to Question #227017 in Macroeconomics for Ali ali

Question

We call the model of income determination developed in this chapter a keinsien one . What nakes it keinsien as apposed to classical one ?

Answer 1

In a two-sector economy, the Keynesian model of income determination examines two approaches to income determination and output. That is the aggregate demand and aggregate supply method, as well as the saving investment method. The equilibrium level of national income is determined by the Keynesian model at the point where the AD curve intersects the aggregate supply curve.

According to Keynes, the short-run level of national income is determined when intended or planned saving equals intended or planned investment.

The rate of interest, on the other hand, is the balancing force between saving and investment in the classical model. In contrast to the traditional model, which holds that supply generates its own demand. It specifies that it is an 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.