The classical theory relied on Say's law that states that "supply creates its own demand." To the classical economists capitalism would guarantee an equilibrium (or stable) level of economic activity at full employment. Flexible wages, prices, and interest rates would ensure this.

Keynes rejected the classical notion of Say's law. He argued that under-spending was very likely. Keynes focused on aggregate demand (total spending) as being the key determinant to the level of macroeconomic activity not aggregate supply which was the major focus of the classical economists. Aggregate demand (or total spending) equals the sum of consumption, investment, government and net export spending

MPC + MPS = 1

If MPC = 0.90 then MPS = 1 - 0.90 = 0.10

Multiplier = 1 / (1-MPC)
If MPC = 0.90, multiplier = 1 / (1-0.90) = 1 / 0.10 = 10

Change in GDP = 1/ (1 - MPC) * change in AS (aggregate spending)

If government spending increases by $1000 then:

Change in GDP = 10 * $1000 = $10,000

Class, please answer the following:

1- If the MPC equals 0.85, what the MPS equal to?

2- If your MPC is 0.8 and G increases by $200, what will be the change in GDP?

3- If MPC = 0.8 what is the size of multiplier?

4- what is the size of your MPC and MPS?