Answer to Question #20740 in Macroeconomics for serena
What were the key differences Between Keynes theory of income determination and that of the classical economists? Why did Keynes think that the market system could break down?
Classics thought that inequality of saving and investment is the cause of the ups and downs in the trade cycle: if savings exceed investment, the depression or recession is inevitable;if investments exceed savings, then the danger of inflationary boom comes. Keynesians also proved that savings and investments are equal, based on the fact that the actual savings and investment are equal to the difference between income and consumption. Although the motivations that make people to save, often different from the motives that encourage business to invest. Like saving the consumption depends on the level of national income, and the investment is dependent on factors such as population growth, new territories, new scientific and technological discoveries, new preferences manufacturers, new flavors, etc. Mutual balance between the desire to save and invest through changes in the level of income. The equilibrium level of national income and employment must be at the point of intersection of savings and investment . The intersection of savings and investment reflects a state of equilibrium, which will seek to national income. That is the essence of the theory of determining the level of national income. In the income-expenditure model, the equilibrium level of real GDP is the level of real GDP that is consistent with the current level of aggregate expenditure. If the current level of aggregate expenditure is not sufficient to purchase all of the real GDP supplied, output will be cut back until the level of real GDP is equal to the level of aggregate expenditure. Hence, if the current level of aggregate expenditure is not sufficient to purchase the natural level of real GDP, then the equilibrium level of real GDP will lie somewhere below the natural level.