Compare and contrast Say's views of the macroeconomy with that of Keynes. What does each have to say about the economy in relationship to its potential level of real GDP?

Question

What will be an ideal response?

Answer 1

Jean-Baptiste Say, a prominent French economist of the 19th century, reasoned that "supply creates its own demand." In Say's view, the production of goods and services creates enough income so that there will be a demand for all the goods and services produced. The economy adjusts so that aggregate expenditure equals potential GDP and, as a result, real GDP equals potential GDP. John Maynard Keynes, a prominent 20th century English economist disagreed. He reasoned that supply does not create its own demand and that it is effective demand that determines real GDP. If businesses fail to invest as much as people save, aggregate planned expenditures will be less than potential GDP. Prices and wages are sticky and so, in this case, resources can become unemployed and remain unemployed indefinitely. Real GDP will be less than potential GDP.