Assignment Unit 2 - Keynesian and classical economics PDF

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Keynesian and classical economics...

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Introduction

Firstly let’s look into what macroeconomics is. I will say, it is a branch of economics that deals with the overall economy and how the market system operates. “Macroeconomics deals with the performance, structure, and behavior of the entire economy, in contrast to microeconomics, which is more focused on the choices made by individual actors in the economy ((like people, households, industries” (Chappelow & Segal, 2019).

The concern of the economist has been focused on unemployment, growth, price, and trade. “The link between goods markets and large-scale financial variables such as price levels and interest rates was explained through the unique role that money plays in the economy as a medium of exchange by economists such as Knut Wicksell, Irving Fisher, and Ludwig von Mises” (Chappelow & Segal, 2019).

Many economists have many different thoughts about macroeconomics. This has to do with views on how the market and their participants work. In classical economics, the economist “ hold that prices, wages, and rates are flexible and markets always clear, building on Adam Smith's original theories” (Chappelow & Segal, 2019).

“Keynesian economics was largely founded based on the works of John Maynard Keynes ” (Chappelow & Segal, 2019). These economists hold that the business cycle can be managed by the active government.

What are the similarities and differences between Keynesian and classical economics? Similarities: The classical economics anchors on the fact that the free-market leads to an efficient outcome. The classical economics assumes that the long-run aggregate supply curve is inelastic; therefore any deviation from full employment will only be temporary (Economics help, nd). In macroeconomics, the classical stresses the importance of limiting government intervention and makes sure to keep the markets free of potential barriers.

In macroeconomics, the Keynesians place a greater role for expansionary fiscal policy to overcome the recession. They also argue that the economy can be below full capacity for consideration time due to imperfect market.

Differences :

In the classical economy, supply creates demand. If a good is produced, it has to be bought. But, this assumption also does not hold good today. Deman is not based on production or supply. In Keynesian economics, it recognizes that only a fraction of the household income will be used for consumption purposes.

Classical economics has flexible prices. The prices of wages, commodities, rent and so on must be upwardly and downwardly. Whereas in Keynesian economics, prices are not flexible due to long term wage agreements, etc.

How does each handle issues of unemployment? Classical economists believe that any unemployment that occurs in the labor market or other resource markets should be considered voluntary unemployment. Voluntarily unemployed workers are unemployed because they refuse to accept lower wages.

Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy, such as tax cuts to stimulate consumption and investment or direct increases in government spending that would shift the aggregate demand curve to the right. What new developments starting in the 1980s have changed macroeconomic thought? The aggressive contractionary policy aimed at lowering inflation is the new development in the 1980s that has changed. This policy worsened the recession and cause inflation rates to continue. Conclusion: In classical economics, the free market economies are stable and tending towards full employment. In Keynesian economics the free market is unstable.

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References: Chappelow, J. & Segal, T. (July 23, 2019). Macroeconomics. Retrieved from https://www.investopedia.com/terms/m/macroeconomics.asp Economics Help. (nd). Keynesian vs Classical models and policies Retrieved from https://www.economicshelp.org/keynesian-vs-classical-models-and-policies/...