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Assumptions: Classical Theory vs.. Keynesian
Classical Assumptions
All markets, goods, resources, and financial, are competitive. Prices go up and go down in all markets to make sure no shortages or surpluses exist.
Governments have balanced budgets: G=T. Therefore government does not borrow.
Households spend all their income unless interest rates are high enough to get them to save.
Firms borrow just enough to finance I. The financial markets make sure S = I.
There are no significant trade or flows with R.O.W.