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There are others that have posted this same question do not copy from them, explain in your own words please, don't use other sources simply explain in your own words The following passage appears in the first chapter of The General Theory

Economics Dec 06, 2020

There are others that have posted this same question do not copy from them, explain in your own words please, don't use other sources simply explain in your own words

The following passage appears in the first chapter of The General Theory. Explain in your own words what Keynes means when he argues that the classical theory is a special case. Why are there multiple equilibria in Keynes’s system? What are the ‘facts of experience’ to which he is referring?

I shall argue that the postulates of the classical theory are applicable to a special case only and not to the general case, the situation which it assumes being a limiting point of the possible positions of equilibrium. Moreover, the characteristics of the special case assumed by the classical theory happen not to be those of the economic society which we actually live, with the result that its teaching is misleading and disastrous if we attempt to apply it to the facts of experience.

Expert Solution

The Classical Theory believes that the economy tends to return to and stay at the full employement level. Thus, when circumstances arise that cause the economy to fall below or to exceed the natural level of employment, self adjustement mechanisms occur which again bring the economy back up. This is based on the belief that prices, wages and interest rates are flexible. Another assumption to this theory is Say's Law which asserts that the economy is capable of demanding all the output that the workers choose to produce. Thus, the economy always attains the natural state.

Keynes' equilibria had four unique features, making the theory different from the neoclassical models. The first feature is that the equilibria each reflected a function that differed in content from ots predesessors. Secondly, it was based on the use of the ex-ante, ex-post equilibrium analysis. Thirdly, it presented an alternative view, completely different to what has been studied till now. Lastly, it reflects the fact that the national income determines the level of aggregate demandwhich again determines the level of national income and employment. Keynes focussed on short term and used equilibrium in two senses- as a position of rest and as a chosen position.

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