Econ Week 7

Jean Baptiste Say is responsible for Say’s law. It states, “Supply creates its own demand” Each time a good or service is produced and sold, it represents income to someone.

Neoclassical Economists: Economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run.

Keynes’s law states that, “Demand creates its own supply.” The level of GDP in the economy is not primarily determined by the potential of what the economy can supply, but rather by the amount of total demand.

Why would an economist choose either the neoclassical perspective or the Keynesian perspective, but not both?

→ These two perspectives are contradictory in terms of policy positions, and cannot both be held simultaneously

Aggregate demand aggregate supply model (ADAS Model) shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level

Aggregate supply (AS) measures the total quantity of output (ex: real GDP) firms will produce and sell.

Potential GDP: the maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions.

Full employment GDP (another name for potential GDP) when the economy is producing at its potential and unemployment is at the natural rate of unemployment

Aggregate demand (AD) the amount of total spending on domestic goods and services in an economy. It includes all 4 components of demand: consumption, investment, government spending, and net exports (exports minus imports)