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ASSUMPTIONS, KEYNESIAN ECONOMICS: The macroeconomic study of Keynesian economics relies on three key assumptions--rigid prices, effective demand, and savings-investment determinants. First, rigid or inflexible prices prevent some markets from achieving equilibrium in the short run. Second, effective demand means that consumption expenditures are based on actual income, not full employment or equilibrium income. Lastly, important savings and investment determinants include income, expectations, and other influences beyond the interest rate. These three assumptions imply that the economy can achieve a short-run equilibrium at less than full-employment production.
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Lesson 14: Aggregate Supply | Unit 2: Two Options
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Page: 5 of 20
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In the long run all prices are flexible, which ensures that all markets are in equilibrium.- Prices rise to eliminate market shortages and fall to eliminate market surpluses, resulting in equilibrium.
- Equilibrium in the labor market is particularly important:
- In the long run, the labor market is characterized by both flexible prices and full employment.
- The economy is operating on the boundary of the production possibilities curve.
- The time it takes prices to adjust to correct market disequilibrium and get to the long run is critical to the study of macroeconomics and government policies.
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PHENOMENON An event or action that is subject to investigation, analysis, and explanation using the scientific method. Phenomena are the sorts of things that science seeks to explain. They can be common events, like the blowing wind, or unusual, like the extinction of the dinosaurs.
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A half gallon milk jug holds about $50 in pennies.
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"If anything terrifies me, I must try to conquer it. " -- Francis Charles Chichester, yachtsman, aviator
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AIBD
Association of International Bond Dealers (now called International Securities Market Association)
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