IAI Actuarial Core Principles · Business Economics · Main economic schools and their key features
In the classical model, what mechanism ensures that saving equals investment, so that saving does not cause a shortfall in aggregate demand?
Classical economists relied on flexible interest rates in the loanable funds market. If saving exceeds investment demand, the interest rate falls, reducing saving and raising investment until they are equal, so saving leaks nothing from aggregate demand in the long run.
- AAutomatic fiscal stabilisers adjusting the budget deficit
- BFlexible interest rates in the loanable funds marketCorrect
- CCentral bank open market operations targeting inflation
- DRising exports offsetting domestic saving
- Sticky wages clearing the labour market
Explanation
Classical economists argued that if saving exceeds planned investment, the interest rate falls, which discourages saving and encourages investment until the two are equal. Fiscal stabilisers and central bank operations are not part of the classical self-correcting argument.
Did you get it right without looking?
One question tells you little. A timed set on Main economic schools and their key features shows your real accuracy, how long you take and where you lose marks.
More Main economic schools and their key features questions
- Marx argued that the rate of profit tends to fall over time. Consider a firm with constant capital c, variable capital v and surplus value s…
- In a simple Keynesian model with no government or foreign trade, the marginal propensity to consume is 0.75. A private firm in India raises …
- A New Keynesian economist explains why a fall in aggregate demand can reduce output for a long time. Which explanation is most consistent wi…
- Which of the following is a feature of the neoclassical approach that distinguishes it from the classical school's treatment of value?
- Which statement best captures the central monetarist view associated with Milton Friedman about the relationship between money and prices?
- Which statement best describes the Keynesian view of the 'paradox of thrift'?