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  • 8/2/2019 vishakha ojha


    Says low of market

    Submitted to-

    Mr. rajesh sir

    submitted by-

    vishakha ojha

  • 8/2/2019 vishakha ojha


    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


    If the amount people wish to save increases

    shifting S to S the equilibrium i rate falls



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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


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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