...Homework 3 * Explain differences between Keynesian and Classical Economics. The differences between Keynesian and Classical Economics are as follows: Keynesian economics believe that when the economy is in a recession that price and wage remain the same and are inflexible. Wages are unable to be lowered beyond a certain point due to union contracts and minimum wage laws and will not be raised due to the supply of unemployed workers willing to work at the prevailing wages and the price of goods remain fixed due to steady supply and no change in demand. In order to jump start the economy Keynesian economics suggest that increased government spending will increase the GDP thereby shifting the aggregate demand curve which can help jumpstart the economy by creating more demand and resulting in the demand for labor to meet that demand. The classical economics viewpoint is that the economy will self-regulate over time and the government should take hands off approach. They believe that price and wage will remain flexible and increase or decrease as needed to maintain equilibrium in the economy. * In your opinion when (if ever) should the government use Keynesian economic policy? I believe the government should follow the Keynesian economic policy in times of recession such as they did in the most recent one in 2009. The Keynesian policy will help increase the aggregate demand by raising the GDP which will create the need for workers to meet that demand. This helps...
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...Economics and Growth - The demand curve is likely to change upwards or rise as a result of changes in a number of factors. One, if there is a move up in the price of an alternative commodity, or decrease in price of the giv...[ view ] Classical Economics vs. Keynesian Economics :: 5 Works Cited Length: 1187 words (3.4 double-spaced pages) Rating: Red (FREE) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - My research of Classical Economics and Keynesian Economics has given me the opportunity to form an opinion on this greatly debated topic in economics. After researching this topic in great lengths, I have determined the Keynesian Economics far exceeds greatness for America compared to that of Classical Economics. I will begin my paper by first addressing my understanding of both economic theories, I will then compare and contrast both theories, and end my paper with my opinions on why I believe Keynesian Economics is what is best for America. Classical Economics is a theory that suggests by leaving the free market alone without human intervention; equilibrium will be obtained. This theory was the first school of thought for economists and one of the major theorists and founders of Classical Economics was Adam Smith. Smith stated, “By pursuing his own interest, he (man) frequently promotes that (good) of the society more effectually than when he really intends to promote it. I (Adam Smith) have never known much good done by those...
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...Basic Theory Classical economic theory is rooted in the concept of a laissez-faire economic market. A laissez-faire--also known as free--market requires little to no government intervention. It also allows individuals to act according to their own self interest regarding economic decisions. This ensures economic resources are allocated according to the desires of individuals and businesses in the marketplace. Classical economics uses the value theory to determine prices in the economic market. An item’s value is determined based on production output, technology and wages paid to produce the item. Keynesian economic theory relies on spending and aggregate demand to define the economic marketplace. Keynesian economists believe the aggregate demand is often influenced by public and private decisions. Public decisions represent government agencies and municipalities. Private decisions include individuals and businesses in the economic marketplace. Keynesian economic theory relies heavily on the fact that a nation’s monetary policy can affect a company’s economy. Government Spending Government spending is not a major force in a classical economic theory. Classical economists believe that consumer spending and business investment represents the more important parts of a nation’s economic growth. Too much government spending takes away valuable economic resources needed by individuals and businesses. To classical economists, government...
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...Who was Keynes and what were his ideas? John Maynard Keynes, born in 1883, is considered to be one of the most influential economists of the 20th century. He was most prominent during the Great Depression in the 1930s when he tried to create an economical revolution in economic thinking with his ideas of intervention in markets. The idea is also generally; that in the short run productive activity is very much influenced by aggregate demand, (aggregate demand is the total spending in the economy with the equation; Consumption + Investment + Government Expenditure + (Exports - Imports)) and that aggregate demand does not equal the productive capacity of the economy. Keynes believed strongly that Government Intervention would strongly help the economy to succeed and grow. His three main argument points concerning the Government were : The Government has a role to play in moderating the business cycle. Government can use short term monetary policy to engineer the economy. During economic hardship the government should spend to try and 'spur' on economic growth. In the second point I mentioned monetary policy, but what is it? It involves changes in the base rate of interest to influence the growth of aggregate demand, the money supply and price inflation. A short goal would be set for the economy to achieve this by changing the base rate. If the economy is doing well, the government should stop spending money, or spend less, but if the economy is bombing, the government...
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...Question 1 Introduction In economics there are two main schools of thought; these schools differ in their belief of what policies are best suited to attain full employment in the economy. Keynesians tend to favour demand side policies and are more prone to intervene in the market and therefore prefer to use fiscal policy whilst monetarists believe adjustments in money supply is more appropriate in stabilising the market ,therefore preferring monetary policy. In this question I will discuss the views of Keynesians and monetarists regarding the effectiveness of monetary and fiscal policies in controlling aggregate demand through the IS-LM framework. I will first provide a brief description of the curves explaining their formation and what they represent and then I will go on to examine monetary and fiscal policy within the IS-LM framework. Finally, I will examine the views of monetarist and Keynesians regarding the effectiveness of both policies in raising the level of national l income and also consider the extreme cases. The IS-LM model was initially developed by John Hicks in 1937 but was made popular in 1949 by Hansen in order ‘to provide a framework for analysing the factors determining the level of aggregate demand’. The IS-LM model is a short run model of the determination of output. It shows the unique combination of income and interest rates that lead to an equilibrium in both the goods and money market at the same time (Begg, 2008). The IS-LM model is presented...
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...function, total, average and marginal products, isoquants and economic regions of production, cost minimization and expansion path, elasticity of substitution, economies of scale, Cobb Douglas, fixed coefficient and CES functions, short run and long run costs. REFERRENCES: - Maddala-Miller Pindyck-Rubinfeld Varian (Intermediate) Ferguson-Gould Kutsoyanis (Modern Microeconomics) PAPER – II: MACROECONOMICS I Full Marks - 50 1. NATIONAL INCOME ACCOUNTING: Methods of calculating national income, national income as a measure of economic welfare and other concepts. 2. THE ECONOMY IN THE SHORT RUN: Simple Keynesian Model, Static Multiplier, IS-LM analysis, fiscal and monetary policy. 3. THE ECONOMY IN THE LONG RUN: The...
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...FROM CLASSICAL TO KENYESSIAN ECONOMICS Great Depression In the 1930s, American capitalism practically stopped working.For more than a decade, from 1929 to 1940, America's free-market economy failed to operate at a level that allowed most Americans to attain economic success. The depth economic collapse and social disarray that mired America then was unprecedented. * By 1933, the country's GNP had fallen to barely half its 1929 level12. * Industrial production fell by more than half, and construction of new industrial plants fell by more than 90%. Production of automobiles dropped by two-thirds; steel plants operated at 12% of capacity. * More than 13 million Americans lost their jobs. Of those, 62% found themselves out of work for longer than a year; 44% longer than two years; 24% longer than three years; and 11% longer than four years. Unemployment peaked at a staggering 24.1% in 1933. * The financial meltdown initiated by Wall Street's Great Crash of 1929 caused billions of dollars in assets to vanish into thin air. Wealthy Americans—who owned almost all the nation's stocks at the time—were walloped by an 80% decline in the value of the stock market. * Even more troubling to the entire population were rampant bank failures—between 1929 and 1933, two out of every five banks in America collapsed, causing more than $7 billion of their customers' hard-earned money to evaporate. Factors responsible The stock market crash of October of 1929. * The...
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...the U.S. economy could sink into another recession creating a double bottom recovery pattern (as opposed to a V shaped recovery)(Spencer 2009). The U.S. Congress has done a good job at not spooking the markets. If the markets believed that the Fed would be raising the interest rates, the economy could slip into another recession. Ben Bernanke has promised to keep interest rates "exceptionally low for an extended period of time." As we move past the point where recession is a concern, inflation and security bubbles become the next concern. We know the Fed is going to raise rates, but when and by how much? No one’s knows that at all.(Spencer 2009) The Main macroeconomics theory is: Classical-Keynesian synthesis Keynesian - in the Short Run. Classical - in the Long Run. Difference between the two: Prices. The GDP fell as much as 25% in the years following the great depression. If business at that time had had access to capital, much of the subsequent poverty and suffering could have been avoided. The fed needs to ensure that credit is...
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...These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (an expansion or boom), and periods of relative stagnation or decline (a contraction or recession).Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite being termed cycles, these fluctuations in economic activity can prove unpredictable. History A BASIC ILLUSTRATION OF ECONOMY/BUSINESS CIRCLE. Theory The first systematic exposition of periodic economic crises, in opposition to the existing theory of economic equilibrium, was the 1819 Nouveaux Principes d'économie politique by Jean Charles Léonard de Sismondi. Prior to that point classical economics had either denied the existence of business cycles, blamed them on external factors, notably war, or only studied the long term. Sismondi found vindication in the Panic of 1825, which was the first unarguably international economic crisis, occurring in peacetime. Sismondi and his contemporary Robert Owen, who expressed similar but less systematic thoughts in 1817 Report to the Committee of the Association for the Relief of the Manufacturing Poor, both identified the cause of economic cycles as overproduction and underconsumption, caused in particular by wealth inequality. They advocated government...
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...MACROECONOMICS & THE GLOBAL ECONOMY Instructor SATYENDRA TIMILSINA What is Macroeconomics? • It is that branch of economics, which deals economic affairs at large i.e. total or aggregates • Concerns itself with variables such as – – – – Aggregate output of the economy Extent to which its resources are used Size of National Income General Price Level Introduction • Managers have to deal with economic environment at two levels – micro level and macro level • Micro level includes market structure and the strength of competitors. Firm’s decision making is mostly influenced by the activities of its rival forms. The following are some factors that affect firms decision at micro level – Level of competition – Cost of production and – Product differentiation Introduction • Macro level includes the overall system. This is something that the firm assumes to the given. • Decision making of the firm is affected by the macroeconomic environment. • The following macroeconomic factors have a strong effect on firm’s decision making – Overall Demand – Price Level – Rate of interest – Tax policies and – Exchange Rates Introduction • It is important for managers to know the macroeconomics because an unprecedented change in any of these factors can upset the revenue and cost of the firm, affecting the profitability and returns. • The problem can be minimized or managed if managers know the working of an economy and thereby, judge the...
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...people will want to work at various real wage rates slopes upwards: as the wage rate increases, more and more individuals decide they are better off working than not working... rise in the wage rate increases the number of people in the economy who want to work -demand curve: how many workers firms will want to hire at various real wage rates downward sloping: as the wage rate increases, each firm in the economy will find to maximize profit it should employ fewer workers than before a rise in the wage rate will decrease the quantity of labor demanded in the economy -demand curve shifts: the capital stock, the availability of resources, taxes on goods sold -supply curve shifts: size of the population, tastes for labor and market goods vs. leisure, taxes on consumption (taxes on labor we can represent in the labor market model) If excess supply of labor: competition among workers would drive the wage down if excess demand of labor: competition among firms would drive wage upward equilibrium total employment = market clears, economy achieves full employment -level of employment is achieved automatically -unemployment is viewed as frictional.. frictional unemployment causes actual unemployment to be less than the maximum possible Loanable funds market= r and S=I -supply curve: level of household saving at various interest rates, slopes upward (quantity of funds supplied to the financial market depends positively on the interest rate) -demand curve- businesses’ demand...
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...United States vs. Canada [Econ 101 – Summer] United States vs. Canada Introduction Macroeconomics is the field of the economics that deals with how individuals change their economic behavior when there is change in the market-wide policies. One of the two applications that are widely studied in the macroeconomics is the Fiscal Policy, Monetary Policy and aspect of Monopoly. The fiscal policy is implemented by the government of the U.S. The monetary policy is reviewed during the schedule of 8 meetings per year, during which it is analyzed and discussed that how economic and financial developments taking place in the country and determines the appropriate stance of the monetary policy. However, monopoly disables new and young businesses to grow or take birth with such heavy financial requirements for entering in the markets. This paper deals with the current economic situation, especially at the macro level, faced by the United States of America, the world’s largest economy and then it is compared with the economy of Canada and several aspects are discussed in the later part of the paper. Discussion United States The past twenty years has seen a great shift in economics of this country. In the early 1990’s the U.S. economy was struggling and was a major topic of the previous presidential election. Fast forward twenty years and an economic boom and bust later, the presidential election again was based on a struggling economy. By taking a closer look...
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...Abstract The relationship between inflation and growth has remained a controversial one in both theory and empirical findings. Over the past couple of years, a lot of economists have claimed that an increase in economic growth leads to an increase in inflation and that decreased growth reduces inflation. There are several theories to explain the nature and existence of the inflation-economic growth with the theories suggesting that variety of possible conclusions. These include: Classical, Keynesian, Neo-Keynesian, Monetarist, Neo-classical and Endogenous growth theories. Studies have shown that inflation and its variability have significant real costs to the economy with several of the studies indicating that a 10% inflation rate can cause up to 3% loss in the GNP thus many governments have adopted inflation targeting as a dominant economic policy framework. While all the studies agree with Bruno and Easterly conclusion that inflation threshold will occur somewhere below 20% they differ significantly on the specific threshold rates. Most of the studies reviewed conclude that there is indeed a significant negative relationship between inflation and economic growth at high inflation rates in the long run. However, while many sophisticated techniques have been applied in an attempt to explain the relationship between inflation and economic growth; many key questions still remain unresolved. Introduction: The objective of this paper is to study the relationship between...
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...Team Challenger Weekly Reflection-Economic Forecasting Paper ECO/372 November 26, 2012 University of Phoenix Week 2 Reflection-Economic Forecasting Viewing the economic standing of America may not be easy to comprehend, with all the economic terms and statistics. To assist with the economic terminology, and view what production/income, prices, and cyclical indicators are in the United States, an Internet website called AmosWEB Encyclonomic WEB*Pedia can retrieve resourceful information. This site has great information for a consumer to become familiar with economic terminology and economic standing. Some of this information on the site indicates the “Real GDP as of third quarter 2012, $15,775.7 billion (Annual Rate) Source: BEA, up 2.0% 1st Est. revised up from 1.3%. Unemployment as of October 2012 is 7.9% up from last month. This information was obtained from the Bureau of Labor and Statistics. The consumer Price Index W, as of August 2012 is 227.056.” A person can even view what the prime rate is for American loans which are 3.25%. AmosWeb pulls information from other sites and make it easier for consumers to view these numbers in one location instead of viewing different consumer sites. The U.S. Department of Commerce contains the Bureau of Economic Analysis, and this bureau maintains the website www.bea.gov. This website contains all of the BEA’s published information, including news releases and a comprehensive...
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...the central bank. Increases by the central bank have the capability to drive down interest rates, inevitably making credit artificially cheap. Contributing to this issue, is business men making capital investments, unknowingly receiving distorted price signals from the credit market. Capital investments are inconsistent. Long-term investments are more sensitive to interest rates. Hayek came to the conclusion that artificially low interest rates causes investments to be high, which in turn causes too much investment in long-term projects. Instances like this turn the boom into a bust. Hayek viewed busts as a positive, because it is a natural readjustment. Hayek explained the way to avoid busts, is to avoid the booms that cause them. Keynes vs. Hayek: The Rise of the Chicago School of Economics. (2015). Retrieved from http://www.econedlink.org/lessons/index.php?lid=593&type=student In this article the economic views of John Maynard Keynes and Friedrich...
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