İKTİSADA GİRİŞ II - Deneme Sınavı - 25

In the equilibrium approach of the Classical model, thanks to the smooth operation of the market mechanism, the economy is in constant balance, that is, at full employment. In here, markets have perfect competition characteristics.

According to this law, a certain amount of income is generated as a result of the production of goods and services. 

The starting point is increase in production.

If the production factors want to save money rather, an spend a portion of their income, then the all return from productions of the firms will not be expended. Therefore, the quantity demanded for goods and services will be lower than the quantity produced.

In case of production or supply surplus, firms will decrease their production and start to lay their workers. This means that the economy diverges from the level of full employment.

When households decide to save a portion of their income, how will the necessary expenditure to be made ensure the complete purchase of the economy’s production?

The Classics’ answer to this question is that savings of the production factors are invested by the firms. Such a reduction in expenditure resulting from savings will be offset by investments. What is important here is how the savings will be equal to investments.

According to Classical economists, interest rate is the key variable to provide this equality.

According to Classical economists, interest rate is the key variable to provide saving-investment equality. This interest rate, which is determined on the loanable funds market, will change so as to ensure that the funds provided as a result of savings are equal to the funds requested for investments. End of this process, equilibrium interest rate rises in the market and the amount invested will be equal to the amount saved.

According to Keynesian model, one reason why equilibrium income is not always at full employment level is that investment and saving equality cannot always be provided as Classics argue.

When the planned expenditure is greater than the value of current production, production will increase to meet the demand for goods and services. The fact that aggregate expenditures are greater than GDP means that more than the amount of goods and services currently produced in the economy is planned to purchase. To meet this demand, firms sell goods and services that they have produced in the past and are waiting in stock.

In other words, if the planned expenditures are greater than GDP, firms’ stocks decrease. The change in stocks compensates the planned expenditure exceeding the GDP. Thus, actual expenditures, including unplanned changes in stocks, are equalized to GDP. Decreasing stocks will cause firms to increase their production

Multiplier = 1 / (MPS+MPI) 

In here, 1 / (0.40+0.10) = 2

For a closed economy, Multiplier = 1 / (1-MPC).

In here, 1 / (1-MPC) = 2 ;

1-MPC=0.50 ; MPC=0.50

30 x Multiplier =45 ; 

Multiplier = 1.5

The views of the classical model which guarantee full employment equilibrium were began to be questioned as a result of the long-term economic stagnation and the associated high unemployment during Great Depression that occurred in the 1930s.

Keynes links the deviations from full employment to the inadequacy of aggregate expenditures in the economy.

Aggregate supply refers to the amount of goods and services that are desired to be produced in the economy.

When the planned expenditure is greater than the value of current production, production will increase to meet the demand for goods and services.

Taxes lead to compulsory reductions in consumption expenditures. In other words, taxes show the revenue that government transfers from households to itself.

If the injections are greater than the leakages, the planned aggregate expenditures will also be greater than current income.

When the households decide to increase their savings without a change in income level, interesting contradiction called as saving paradox will arise.

Increasing savings in the economy will cause total spending and income to decrease as long as it does not turn into investment.

The multiplier is a coefficient that can give us to opportunity to calculate how much income will change when there is a shift in aggregate expenditures, stemming from the change in autonomous expenditures.

Cyclical unemployment is the unemployment caused by the recessions occasionally occurred in economic life and it is the unemployment which occurs during contraction of production volume experienced from time to time. The corect answer is "B".