Q1.
Income $760
Taxes to Government $100
Consumer spending $560
Gross investment $110
Depreciation $40
Government Spending $130
1) GDP=$(560+110+130)= $800
Household savings =$(760-100-560) = $100
2) For this closed economy which is inherently self-sufficient and removed from the rudiments of import and exports the leakages are the savings and the taxes and the injections are the investment and the government spending.
The relationship between the leakages and the injection are simple in that in reference to the Keynesian economy the Government would have to intervene and inject cash into the system if leakages causes a shortage of capital. In essence an economy is in equilibrium when the rate of injections is equal …show more content…
The differences between the classical and Keynesian schools of Economics are as follows:
CLASSICAL SCHOOL KEYNESIAN SCHOOL
It is a self-regulating system of markets which would reach full employment by itself The economy operates at less than full employment in that the market would not absorb all individuals that are looking for a job and the market does not adjust itself
Supply creates its own demand in that the economy is stimulated when more goods are produced Consumer income stimulates demand resulting in growth of the economy
The market is perfect and sustains itself therefore there is no need for Government intervention as the market adjusts according to the prevailing situation. The market is imperfect and cannot sustain itself and hence it becomes necessary for Government to intervene in the event that economic growth is not being realized
Money is not demanded for its own use but as a means to smooth the progress of transactions when trading Wages have the tendency to increase but meets with resistance any attempt for a decrease hence the existence of negotiating bodies who represent workers(eg. trade unions …show more content…
The precautionary motive supports the public’s quest to hold money to provide for contingencies requiring unexpected spending and for unforeseen opportunities of advantageous purchase. This motive is a product of uncertainties of all kinds. This provisional motive giving rise to the provisional demand for money is an extremely important motive brought to the fore by Keynes.
The speculative motive-This is sometimes also called the asset demand for money because, money being an asset, the entire demand for it is an asset demand.
Essentially Keynes recognized human’s inherent demand for money in its liquid form, apparently he sensed the power that liquid cash has to put the holder in a positive position to bargain. Another reason is that the holders of such speculative balances may anticipate such fall in future prices and be able to take advantage of the prevailing
Income $760
Taxes to Government $100
Consumer spending $560
Gross investment $110
Depreciation $40
Government Spending $130
1) GDP=$(560+110+130)= $800
Household savings =$(760-100-560) = $100
2) For this closed economy which is inherently self-sufficient and removed from the rudiments of import and exports the leakages are the savings and the taxes and the injections are the investment and the government spending.
The relationship between the leakages and the injection are simple in that in reference to the Keynesian economy the Government would have to intervene and inject cash into the system if leakages causes a shortage of capital. In essence an economy is in equilibrium when the rate of injections is equal …show more content…
The differences between the classical and Keynesian schools of Economics are as follows:
CLASSICAL SCHOOL KEYNESIAN SCHOOL
It is a self-regulating system of markets which would reach full employment by itself The economy operates at less than full employment in that the market would not absorb all individuals that are looking for a job and the market does not adjust itself
Supply creates its own demand in that the economy is stimulated when more goods are produced Consumer income stimulates demand resulting in growth of the economy
The market is perfect and sustains itself therefore there is no need for Government intervention as the market adjusts according to the prevailing situation. The market is imperfect and cannot sustain itself and hence it becomes necessary for Government to intervene in the event that economic growth is not being realized
Money is not demanded for its own use but as a means to smooth the progress of transactions when trading Wages have the tendency to increase but meets with resistance any attempt for a decrease hence the existence of negotiating bodies who represent workers(eg. trade unions …show more content…
The precautionary motive supports the public’s quest to hold money to provide for contingencies requiring unexpected spending and for unforeseen opportunities of advantageous purchase. This motive is a product of uncertainties of all kinds. This provisional motive giving rise to the provisional demand for money is an extremely important motive brought to the fore by Keynes.
The speculative motive-This is sometimes also called the asset demand for money because, money being an asset, the entire demand for it is an asset demand.
Essentially Keynes recognized human’s inherent demand for money in its liquid form, apparently he sensed the power that liquid cash has to put the holder in a positive position to bargain. Another reason is that the holders of such speculative balances may anticipate such fall in future prices and be able to take advantage of the prevailing