J. B. Say's Macroeconomic Model

1. Say relies upon the cirular fow to develop his thesis:

- Say's Law = Supply creates it's own demand

2. If markets are allowed to clear themselves in each and every market, whether it be a commodity, labor, or loanable funds market, then the macroeconomy will always tend towards full employment.

3. Assumes that savings will always equal investment.

4. Thus, he asserts that govt spending isn't needed to obtain full employment.

Keynes' Criticism of Say's Model

There are non-price reasons for individual saving:

1. saving for future consumption (housing, cars, education)

2. saving for future problems (unemployment, illness, old age)

3. saving cause you can't spend it fast enough

There are non-price reasons for investing:

1. Business climate

2. Opportunities for profit

3. Technological change

In a recession/depression, non-price reasons will cause the savings rate to increase; non-price reasons for investing will cause the rate of investment to decrease.

Savings does not have to equal investment.

The economy does not necessarily tend toward full employment.

Keynesian Macroeconomic Model

Aggregate Demand

Aggregate Supply

Consumption Function

Aggregate Consumption

1. Durable goods:

Last longer than 3 years (cars and appliances). Smallest sector and only one that fluctuates over the business cycle.

2. Non-durable goods:

Don't last longer than 3 years (food and textiles). 

3. Services:

Non-tangible commodities.

Other Influences:

A. Tax rate

B. Terms of credit on credit cards

C. Stock of assets

D. Price expectations

E. Attitudes toward thrift

Engel's Laws

1. As the level of family income increases, the percent of income spent on food decreases.

2. As the level of family income increases, the percent of income spent on housing remains constant.

3. As the level of family income increases, the percent of income spent on medical care increases.

4. As the level of family income increases, the percent of income on most other goods increases. 

What are discretionary stabilizers?

Those programs that the federal government, at their own discretion, can use to manipulate the aggregate demand.

1. public works - create social overhead capital and are projects that the govt has to construct anyway

2. welfare - primary function of the federal govt, spending can be manipulated so it counteracts fluctuations in the growth of the GDP

3. tax rates - can be manipulated so that they always work to counter the business cycle, however it takes a long time for Congress to change tax code