Question from Past Macroeconomics Qualifying Exam (Fall, 2003 - Question three) at George Mason University[]

What is Say's Law of Markets? What insight does Say's Law provide into the analysis of classical economists of various shocks to aggregate demand? Focus in particular on those lines of analysis that refer to over-production or underconsumption. How valid, in your view, is Say's Law of Markets?


Say's law refers to the basic insight that people who offer themselves for labor have in mind uses for the money that will come from that labor. Therefore an aggregate demand shock is driven by a real preference change, people do not want to consume as much consumer goods relative to leisure. It is consistant with the economists goal of positive economics, that if this view is true, nothing positive could be said about the desireability of this observation. This would proclude the idea of over-production or underconsumption. The corrections in the markets would actually reflect a change in the underlying economy made up of individual's preferences. This is consistant with the rational expectations, classical, new classical, and Fisher Black way of looking at the equilibrium in the economy.

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