Keynes's Criticism of Say’s Law in a Money

Economy

 According to classical economists and Say’s law, if consumption spending falls because savings
increase, then total spending will not fall, because the added saving will simply bring about
more investment spending
 Such spending will happen through changes in the interest rate
 The added saving will put downward pressure on the interest rate, and at a lower rate,
businesses will borrow and invest more
 Through changes in the interest rate, the amount of saving will always equal the amount
invested

Keynes disagreed; he didn’t think that added saving would necessarily stimulate an equal amount of
added investment spending

 Classical economists held that saving is directly related to the interest rate; as the interest rate
goes up, saving rises, and as the interest rate goes down, saving falls, ceteris paribus
 Keynes thought this assumption might not always be true; Keynes believed that both saving and
investment depend on a number of factors that may be far more influential than the interest
rate
 As for investment, Keynes believed that the interest rate is important in determining the level
of investment, but not as important as other variables, such as the expected rate of profit on
investment; Keynes argued that if business expectations are pessimistic, then much investment
is unlikely, regardless of how low the interest rate is!
A recessionary gap, or contractionary gap, is a macroeconomic term where a country's real GDP
is lower than it's gross domestic product (GDP) at full employment.
Essentially, a recessionary gap refers to the difference between actual and potential production in
an economy with the actual being lower than the potential, which puts downward pressure on
prices in the long run. Often, these gaps are evident during an economic downturn (recession)
and are associated with higher unemployment numbers.
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Significant reductions in economic activity for several months will indicate a recession. During
periods of recession, companies will often pull back on spending creating a gap from the
contraction in the business cycle. Economists define a recessionary gap as a lower, real-income
level, as measured by real GDP than the real-income level at a point of full employment. Real
GDP values all goods and services for a specific time-frame and adjusts that for inflation. In the
period leading up to a recession, there is often a significant reduction in consumer expenditure or
investment due to a decrease in the take-home pay of workers
Here, the income is 10,00,000

For first 3,00,000 have to pay 0

For the next 1,00,000 have to pay (1,00,000 * 5%) = 5000

For the next 3,00,000 have to pay (3,00,000 * 10%) = 30,000

For the next 3,00,000 have to pay (3,00,000 * 15%) = 45,000

So, total have to pay = BDT 80,000

Here, the income is 12,00,000

For first 3,00,000 have to pay 0

For the next 1,00,000 have to pay (1,00,000 * 5%) = 5000

For the next 3,00,000 have to pay (3,00,000 * 10%) = 30,000

For the next 4,00,000 have to pay (4,00,000 * 15%) = 60,000

So, total have to pay = BDT 95,000

Here, the income is 13,00,000

For first 3,00,000 have to pay 0

For the next 1,00,000 have to pay (1,00,000 * 5%) = 5000

For the next 3,00,000 have to pay (3,00,000 * 10%) = 30,000

For the next 4,00,000 have to pay (4,00,000 * 15%) = 60,000

For the next 1,00,000 have to pay (1,00,000 * 20%) = 20,000

So, total have to pay = BDT 115,000

Here, the income is 13,00,000

For first 3,00,000 have to pay 0

For the next 1,00,000 have to pay (1,00,000 * 5%) = 5000

For the next 3,00,000 have to pay (3,00,000 * 10%) = 30,000

For the next 3,00,000 have to pay (4,00,000 * 15%) = 60,000

For the next 2,00,000 have to pay (2,00,000 * 20%) = 40,000

So, total have to pay = BDT 135,000

Here, the income is 15,00,000

For first 3,00,000 have to pay 0

For the next 1,00,000 have to pay (1,00,000 * 5%) = 5000

For the next 3,00,000 have to pay (3,00,000 * 10%) = 30,000

For the next 3,00,000 have to pay (4,00,000 * 15%) = 60,000

For the next 5,00,000 have to pay (5,00,000 * 20%) = 1,00,000

So, total have to pay = BDT 195,000

Here, the income is 20,00,000

He has to pay (20,00,000 * 25%) = BDT 5,00,000

Here, the income is 13,50,000

For first 3,50,000 have to pay 0

For the next 1,00,000 have to pay (1,00,000 * 5%) = 5000

For the next 3,00,000 have to pay (3,00,000 * 10%) = 30,000

For the next 3,00,000 have to pay (4,00,000 * 15%) = 60,000

For the next 2,00,000 have to pay (2,00,000 * 20%) = 40,000

So, total have to pay = BDT 135,000

 When an economy is in a recession, expansionary fiscal policy is in order. Typically this type of fiscal
policy results in increased government spending and/or lower taxes. A recession results in a recessionary
gap meaning that aggregate demand is at a level lower than it would be in a full employment situation.

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In order to close this gap, a government will typically increase their spending which will directly increase
the aggregate demand curve. At the same time, AD1the government may choose to cut taxes, which will
O indirectly affect the aggregate demand curve by allowing for consumers to have more money at their
Q1 and invest.
disposal to consume Qn The actions of this expansionary fiscal policy would result in a shift of
the aggregate demand curve to the right, which would result closing the recessionary gap and helping an
economy grow.
Contractionary fiscal policy is designed to close an inflationary gap by changing aggregate expenditures
and shifting the aggregate demand curve. An inflationary gap is closed with a leftward shift of the
aggregate demand curve.

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decrease in government purchases, an increase in taxes, or a decrease in transfer payments. This policy
shifts the aggregate demand curve to the left and closes the gap. If done correctly, the aggregate
demand curve intersects the short-run aggregate supply curve at the full employment level of aggregate
production indicated by the long-run aggregate supply curve.
The Laffer Curve was used as a basis for tax cuts in the 1980's with apparent success, but criticized on
practical grounds on the basis of its simplistic assumptions, and on economic grounds that increasing
government revenue might not always be optimal.

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The Laffer Curve describes the relationship between tax rates and total tax revenue, with an
optimal tax rate that maximizes total government tax revenue.
If taxes are too high along the Laffer Curve, then they will discourage the taxed activities, such
as work and investment, enough to actually reduce total tax revenue. In this case, cutting tax
rates will both stimulate economic incentives and increase tax revenue.
Say Bank Z collects 100 crore taka from its depositors then Bank Z has to keep 19.5 crore

taka as reserves. Out of this 19.5 crore taka, at least 6.5 crore taka has to be kept in cash (CRR)

with Bangladesh Bank and the commercial bank will not earn any interest on this amount. The

rest 13% can be kept as government securities which provides interest.

At a given price level, anything that changes 𝐶,𝐼,𝐺,𝑋or 𝑀changes aggregate demand and thus shifts the
aggregate demand (𝐴𝐷) curve. If 𝑀𝑉equals 𝐶+𝐼+𝐺+𝑋−𝑀, then a change in the money supply (𝑀) or a
change in velocity (𝑉) will change aggregate demand and therefore lead to a shift in the 𝐴𝐷 curve. In
other words, aggregate demand depends on both the money supply and velocity. But in the simple
quantity theory of money, velocity is assumed to be constant. Thus, only changes in the money supply
can shift the 𝐴𝐷curve

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