1. Specifically, what aspects of Say’s Law did Keynes criticize and for each point he criticized, what was his offered solution? 2. How did the Great Depression prove Say’s Law to be insufficient and Keynes to be correct? (Be specific)

Say’s Law Classical Economics If You Build It; They Will Come –Ensure full employment –Self correcting –The very act of producing goods generates an amount of income = to the value of the goods produced. “Supply Creates Its Own Demand” –There will always be sufficient consumption

Keynes and Aggregate Expenditures Model Not all income will be spent on output produced “underspending” Econ. Is unstable, NOT self correcting Failure of certain fundamental economic decisions (saving and investment) to be synchronized ***need govt. deficit spending

Note: The amount of goods and services produced and therefore the level of employment depend directly on the level of total or aggregate expenditures. (bottom 168)

Top right 168 Goal Analyze the consumption and investment components (Y=C+I+G+Nx) of aggregate expenditures and derive a “private sector” model of EQUILIBRIUM GDP AND EMPLOYMENT SEE pg. 183 Also note assumptions on 168 –Closed economy

3. Consumption and Savings = Disposable Income 4. What is significant about the 45’ reference line in figure 9-1? Equal distance b/w x, y axis = amount of consumption or disposable income = later = GDP and AGG. Expend.

5. Any space or distance between the Consumption line and the 45’ line represents what? Savings or Dissavings 6. What is dissaving? C > DI HOW? Debt, Liquidation

APC % of any total income which is consumed APC = C / DI APS % of any total income which is saved APS = S / DI

7. In table 9-1 and figure 9-2, why is $390 billion the “break-even income” ? -C = DI and S = $0 8. As Disposable income increases, what happens to average propensity to consume? APC decreases 9. As Disposable income increases, what happens to average propensity to save? APS Increases

10. Explain why the answers to 8 and 9 occur. As income increases, will have ability and desire to save more, the % of income save increases while the % of income consumed decreases 11. Explain why APC +APS always = 1. C + S = DI, then any fraction of C+S = 1

12 Explain MPC and MPS Ratio of CHANGE in consumption or savings in response to CHANGE in income MPC = Change in C / Change in DI MPS = Change in S / Change in DI 13. Explain why MPC + MPS always = 1 The fraction of any change in income which is not consumed then must be saved 14. Develop a theory as to why the U.S. claims the largest APC of any of the industrialized nations and what this says about our country.