|
|
|
LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
Showing 21 out of 157
LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 21
UNEMPLOYMENT
According to classical economics (e.g. Adam Smith):
o
Markets will clear – if someone is unemployed, they will offer to work for a lower wage and connue to lower
the wage at which they are prepared to work unl some employer figures they will make a profit by hiring him;
so there will be lile unemployment and no recession
o
The market, if leſt to itself, will operate at full employment, or near full employment.
o
Recessions should therefore only be temporary.
o
But this was wrong – why?
According to Keynes:
o
The market, if leſt to itself, might operate indefinitely at a high level of unemployment
To explain this, Keynes uses the concept of
aggregate demand
If we assume Smith is right and unemployed people will eventually be employed at lower
wages, the problem is that if the workers work for lower wages, then their income will be
less. Therefore, workers together will have less
money to spend on goods and services
(aggregate demand)
being produced by firms. In order to sell all the goods and services, the
firms will need to lower their prices. If they lower their prices, they will make less profit. At
some point, it will be necessary to lay off their workers again. The workers will then offer to
work for an even lower wage. The cycle connues
At some point, we might eventually reach equilibrium, but there is no reason to assume that
this equilibrium will be at full employment
Also, as a maer of praccal reality, workers may be reluctant to work at a wage substanally lower
than they had been accustomed to receiving
They may eventually, in distress, agree to work for a lower wage, but this may take a long
me
But “In the long run we are all dead.” – so, we need a soluon in the meanme
SAVINGS AND INVESTMENT
According to classical economics:
o
savings
will equal
investment
.
This is because of the invisible hand of the market and interest rates
o
What happens if households save
less
than firms want to invest?
The interest rate will go up – firms wanng to borrow money will offer to pay a higher interest rate,
which will induce households to save more
This process connues unl the amount the households want to save will be the same as the amount
the firms want to invest
o
What happens if households save
more
than firms want to invest?
There are excess savings available for investment, so the interest rate will go down – firms will
aempt to borrow at lower interest rates
Some households will accept lower rates while others might decide to spend money on consumpon
rather than saving – then some sort of equilibrium will be reached
According to Keynes, this is wrong:
o
It may be that if households save less than firms want to invest, firms will offer a higher interest rate, which
induce more people to lend and fewer firms wanng to invest, and therefore savings might equal investment
However, the opposite is not true
In parcular, if there is surplus savings, just because interest rates fall does not necessarily
mean that firms will invest
The decision of a firm to invest is partly influenced by the interest rate, but also other factors
such as confidence. If firms are confident about how the economy will grow, then they are
more likely to borrow money to invest and expand business. If firms are not confident in the
economic future and about being able to sell their goods and services at a profit, they might
not borrow even if the interest rate is very low
Example: the “piece of string” analogy
Ace your assessments! Get Better Grades
Browse thousands of Study Materials & Solutions from your Favorite Schools
Vanderbilt University
Vanderbilt_University
School:
Tax_Law
Course:
Great resource for chem class. Had all the past labs and assignments
Leland P.
Santa Clara University
Introducing Study Plan
Using AI Tools to Help you understand and remember your course concepts better and faster than any other resource.
Find the best videos to learn every concept in that course from Youtube and Tiktok without searching.
Save All Relavent Videos & Materials and access anytime and anywhere
Prepare Smart and Guarantee better grades
Know more
Students also viewed documents
lab 18.docx
lab_18.docx
Course
Course
3
Module5QuizSTA2023.d...
Module5QuizSTA2023.docx.docx
Course
Course
10
Week 7 Test Math302....
Week_7_Test_Math302.docx.docx
Course
Course
30
Chapter 1 Assigment ...
Chapter_1_Assigment_Questions.docx.docx
Course
Course
5
Week 4 tests.docx.do...
Week_4_tests.docx.docx
Course
Course
23
Week 6 tests.docx.do...
Week_6_tests.docx.docx
Course
Course
106
