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Unit 1: Introduction to Macro Economics




          Thus, Fisher's quantity theory of money works as a supplement to Say's law of market. One is  Notes
          not complete without the other.

          Walras' General Equilibrium Model

          General economic equilibrium explained how all prices and quantities would exchange within
          an entire economy for a given period. In contrast, partial equilibrium theory took, as given, all
          prices and quantities exchanged except for one or two and attempted to explain those one or two
          markets within the context of the other given prices and quantities.
          To develop his general economic equilibrium theory, Walras first had to describe some of the
          features of the social and economic setting of the market situation that was to be used in explaining
          the prices and quantities exchanged. From his analysis, Walras came up with a law that proved
          that if all markets but one are in equilibrium, then the last market must also be in equilibrium.
          This meant that with any given set of prices, the total demand for all things exchanged must
          equal the total supply of all things exchanged. Therefore, supply was a consequence of demand.
          This implied that there would always be a demand for all newly produced commodities. If there
          was disequilibrium or excess supply somewhere, then there must also be an equal disequilibrium
          or excess demand somewhere else since total excess supply equaled total excess demand.

          1.1.2  Keynesian Macro Economics

          John Maynard Keynes is well  known for his simple  explanation for  the cause  of the  Great
          Depression. Keynes' economic theory was based on a circular flow of money. His ideas spawned
          a slew of interventionist economic policies during the Great Depression. In Keynes' theory, one
          person's spending goes towards another's earnings, and when that person spends her earnings
          she is, in effect, supporting another's earnings. This circle continues on and helps support a
          normal functioning economy. When the Great Depression hit, people's natural reaction was to
          hoard their money. Under Keynes' theory this stopped the circular flow of money, keeping the
          economy at a standstill.

          Keynes's view that governments should play a major role in economic management marked a
          break with the laissez-faire economics of Adam Smith, which held that economies function best
          when markets are left free of state intervention.
          Keynes argued that full employment could not always be reached by making wages sufficiently
          low. Economies are made up of aggregate quantities of output resulting from aggregate streams
          of expenditure - unemployment is caused if people don't spend enough money.

               !

             Caution  Keynes stated that if Investment exceeds Saving, there will be inflation. If Saving
             exceeds Investment there will be recession. One implication of this is that, in the midst of
             an economic depression, the correct course of action should be to encourage spending and
             discourage saving. This runs contrary to the prevailing wisdom, which says that thrift is
             required in hard times. In Keynes's words, "For the engine which drives Enterprise is not
             Thrift, but Profit."




              Tasks  Find  out more about  JM Keynes-his  achievements, contribution to the field  of
             economics, etc.






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