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Says low of market

Submitted to-

Mr. rajesh sir

submitted by-

vishakha ojha

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PolicSays Law and

Classical Monetary y

Says law is an idea frequently foundin Classical Economics

The idea rejects the possibility of ageneral overproduction or glut

Often stated as supply creates its

own demand Involves a rejection of Malthus

theory of gluts

Smith, Say, Ricardo, James Mill, and J.

S. Mill all supported Says Law

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Bases of Says Law: I The first idea behind Says Law is

there cannot be too much saving

Saving becomes investmentexpenditure and is spent just asconsumption expenditure

Savings and investment expenditure

brought into equality via real interestrate adjustments

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Savings and Investment

S

I

i

S & I

i*

If the amount people wish to save increases

shifting S to S the equilibrium i rate falls

S

i

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Bases of Says Law: II The second basis of Says Law has to

do with the demand for money

Generally the Classical view was thatpeople only held money balances toundertake transactions

Demand for money would bedetermined by the number oftransactions planned and the averageprice at which these transactions wereexpected to take place

People do not hold money as an asset

(as it pays no interest) So when people find their money

balance higher than they wish theyeither consume or save (invest)

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Implications of Says Law

If no one runs their money balances

up or down then there is no hoardingor dishoarding of money

All income not consumed is saved

All saving is invested

All income is spent

Cannot be overproduction orunderconsumption (in general)

Full Employment Agg S = Agg D

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Says Identity Classical writers sometimes say an

excess of supply is an impossibility(J. S. Mill)

Implies that Full Emp Agg S is always= Agg D

This is known as the identity versionof Says Law

A demand is a supply; a supplyis ademand

This does apply in a bartereconomybut does it apply in amonetary economy?

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Says IdentityWould apply to a monetary

economy only if a monetary

economy behaved like a bartereconomy

Money only a veil and has no realeffects

If I sell something my moneybalance goes up and I then buysomething else to reduce mymoney balance

If I buy something my moneybalance falls so I then sellsomething to restore my moneybalance

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Says Identity People cannot run up or run down

money balances

Dichotomizes the economy Real factors only determine

employment, output, income andrelative prices

Monetary factors have no realeffectsdetermine general price levelonly

Is this really what the Classical

economists thought?

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Says Equality In many places Classical writers

suggest that various disturbancesmay cause temporary excess supply

J. S. Mill states commercial crisesmay lead to people wishing to runup money balancesexcessdemand for money or deficient

aggregate demand for goods In this case Says Law expresses an

equilibrium condition, notsomething that is always true or

true by definition This position is called Says

Equality

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Says Equality If what the Classical Economists had in

mind was Says Equality we should find

discussions of disturbances andadjustment mechanisms

Monetary factors can affect the realeconomy but there are adjustmentprocesses back to an equilibrium at fullemployment

Direct mechanism

Indirect mechanism

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Direct Mechanism People may wish to run up or down

their money holdings In a crisis people wish to hold

more money In this case people will try to

increase their money holdings byselling goods or selling off otherassets (stocks)

Md > Ms and full employmentAgg S > Agg D Price level falls until real money

balances increased and people no

longer wish to increase moneyholdings (real balance effect) Md = Ms and FE Agg S = Agg D

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Direct Mechanism Or--Case of increasing money

supply Ms > Md, people find themselves

with more money than they wishto hold

Increase consumption orinvestment expenditures

Add D > FE Agg S Price level rises which increases

demand for money (real balanceeffect) until Md=Ms and FE Agg S= Agg D

Neutrality of money only asbetween equilibrium states.Money can be a disturbing cause.

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Indirect Mechanism Some Classical writers also thought

monetary factors could have an effectthrough the i rate

Market i rate may not equal the real irate that would give S = I

If market i > real i, then S > I and FEAgg S > Agg D

If market i < real i, then I > S and AggD > FE Agg S

Adjustment via banks adjusting irates according to reserve position

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Says Law--Conclusion Lack of clarity over what is always

true and what is true in equilibrium The many discussions of crises and

inflations makes it clear that theClassicals felt money could be a

significant disturbing cause Tendency to equilibrium at FE level

of output

Says equality rather than Says

identity