Question

Question 9 [6] In terms of classical macroeconomic theory: 9.1. Define Say's law. 9.2. Briefly discuss the real interest rate theory. (3) (3)

Answer 1

Oste7 Page No.: 65 do nand say's law states that current demand for goods and services arises from post production which generated income for present Consumption. Thus according to Jean Baptiste say key to economic prosperity is production, not consumption As production will automatically induce consumption According to him decrease in aggregate demand for some goods may be caused by decreased production in some other sector. Say's low supports that govt should not interfere with free market. . Say's low has influenced supply side economists. However the great depression of 1929 overturned say's law as there was enough supply in the market but it could not boost demand. Keynes argued for policies in contradiction to say's law Where he urged the government to increase spending to boost aggregate demand by exapansionary fiscal policy as people heard monly during regimes of low interest rates

Real interest rate theory The classical theory of interest rate also called the real interest rate theory was formulated in early stages by Marshall, Pigou It is called the real interest rate theory because it explains how the real factors ie demand for saving investment and supply of saving intersect and give the equilibrium interest rate hout Demand for savings Demand for savings (investment) is a derived dem and as interest rate declines i e cost of borrowing decreases investment increases and investment is made untill marginal product of capital is equal to cost of borrowing Supply of saving Savings i income excess over consumption we tend to save more when interest rate is high. Thus supply of savings increases as interest rate increases Thus equilibrium interest determined by intersection demand and supply rate of u

Haya No. 67 interest rate & excessply & Demands supply of saving HOPE THIS HELPS C KINDLY UPVOTE