10 OUTLINECLASSICAL THEORY-The classical theory of employment is grounded in Say’s Law, the classical interest rate mechanism, and downwardly flexible prices and wages-The aggregate supply curve is vertical at the full-employment level of output; the aggregate demand curve is stable if the money supply is constant.-Government macroeconomic policies are unnecessary and counter-productive; automatic, built-in mechanisms provide for full-employment output.KEYNESIAN THEORY-Keynesian analysis unlinks saving and investment plans and discredits downward price-wageflexibility, implying that changes in aggregate spending, output, and employment, are likely.-The aggregate supply curve is horizontal; the aggregate demand curve is unstable largely because of the volatility of investment.-Active macroeconomic policies by government are necessary to mitigate recessions or deppressions.-Say’s Law is the disarming notion that the very act of producing goods generates an amount of income exactly equal to the value of the goods produced.-Supply creates its own demand.-Saving would constitute a leakage in the income-expenditure flows and would undermine the ffective operation of Say’s Law.-Saving is a withdrawal of funds from the income stream which will cause consumption expenditures to fall short of total output.-Investment spending by businesses is a supplement to the income-expenditure stream which may fill any consumption gaparising from saving.-Keynesian economics hold that there ar etwo other sources of funds which can be made available in the money market: 1)the accumulated money balances, 2)lending institutions.-The Keynesian position is that saving and investment plans can be at odds and thereby can result in fluctuations in total output, total income, employment, and the pricelevel.-The amount of goods and service produced and therefore the level of employment depend directly on the level of total or aggregate expenditures.-...
