Question

A) Explain why economists who subscribe to classical theory think the economy is price-driven and those who subscribe to Keynesianism think the economy is income-driven? Answer:

B)Why is Say’s Law not applicable in a money economy? Answer:

Answer 1

a) The classical period of economies covers more than 100 years of economic thought. Classical economics can be traced to the pioneering works of Adam Smith. Smith presented a comprehensive analysis of economic phenomena based on the notion of free market and action guided by individual self interest in a Laissez -faire environment.

The market economy can be considered as price driven economy as because the decision regarding investment , production and distribution are guided by price signals created by the forces of demand and supply

In the price driven economy, it encourage free market, laissez -faire , private property rights etc..... When we go through the works of classical economist like Alfred Marshall (founder of Neo classical school of economics ) introduced the concept of producer surplus , consumer surplus , quasi rent etc which becomes  an important element of price driven economy

But when we come to the Keynesian economy the Income driven market can be seemed.John Maynard Keynes on his book"The General Theory of Employment ,Interest and Money" emphasized that govt spending becomes the critical factor that driven for Aggregate demand. This meant that increase in spending would increases the demand in economy.He also advocated that government spend was necessary to maintain full employment .

In the price driven economy ,govt plays only limited role and focuses more on companies and not the individuals.

b) In a money market system if some income happens not to be consumed immediately it will enter the market money as a saving This saving will be put back into the economy as investment. According to Jean Baptiste say[classical economist], say's law or law of market concentrated on the production of the commodity that creates demand . He support the doctrine of  laissez -faire and he belief that a capitalist economy will naturally tend towards full employment without the government intervention. But in money market , it focuses on govt intervention . so we can say that say's law is not applicable in money economy.