Income - Expenditure Model: Keynesian Cross

Keynesian Cross: Analyzing planned expenditures versus actual output using the Keynesian Cross

The Consumption Function

Consumption Function Basics: The basic idea of a consumption function

The (neo) Classical Model

The Classical Model

Today we build up our first macro model – the classical model. Prior to Keynes’ publication of the General Theory of Employment, Interest, and Money (1936), there was not a conception of “macroeconomics.” There was just this idea of economics.

Why the difference? 

Well, when we develop the Keynesian model, we’ll see that we need a theory of output and employment determination that is distinct from the theories that describe individual and firm level decisions. This is because as I suggested earlier in the course, there is this phenomena in economics we call the “paradox of thrift,”  which shows how seemingly rational decisions to save for the future can lead to the inability of society as a whole to do so. This is closely related to Say’s Law and its failure, which leads to unemployment, declining incomes, and ultimately diminishes our ability to save.

In order to understand Keynes’ critique of Say’s Law we need to first lay out the classical model which relies upon Say’s Law.