New Classical and Keynesian Approach of Aggregate Demand and Aggregate Supply

New Classical and Keynesian Approach of Aggregate Demand and Aggregate Supply

Introduction

The aim of this assignment is to discuss the two different schools of economic thought i.e. new classical approach and Keynesian approach of aggregate demand and aggregate supply. The neoclassical economics analyze the price formation through the study of a market rather than confrontation between supply and demand. New classical economists attach great importance to microeconomics, since they serve as the basis for most of their arguments. The neoclassical school, if it has been influenced by many liberal assumptions is not necessarily a liberal school. However, while some have even neoclassical Keynesian principles integrated in their economic approach, the opposing school is called well Keynesianism. Aggregate supply and demand affect the establishment of the equilibrium general price level and equilibrium output in the economy as a whole. All things being equal, the lower the price level, the more of the national product consumers want to buy. The relationship between the price level and real national product which makes the demand are expressed through aggregate demand schedule, which has a negative slope (Grenier, 2011).

Keynesianism is a school of economic thought founded by the Economist John Maynard Keynes. For Keynesians, markets left to them and do not necessarily lead to the economic optimum. In addition, the state has a role to play in the economic field especially in the context of policy stimulus. However, the importance of this role varies with the current Keynesian state and the traditions of different countries. For Keynes, unemployment is the result of a lack of aggregate demand.

Discussion and Analysis

The classical model of full employment, studies the simultaneous equilibrium in the market for labor, goods and money. The production function reflects the technology and the wage is the marginal product of labor. Companies hire staff that maximizes the benefit and money demand is proportional to income. The supply of money goes to the quantity theory of money relating money supply, velocity and number of transactions. The savings and investment vary with the interest rate. The production level or quantity of output does not affect the interest rate. A higher savings lowers interest rates, and investment increases (Ahiakpor, 2003).

In macroeconomics, aggregate supply interacts with aggregate demand. Their coincidence occurs at the aggregate balance of the market. In reality, there is only a trend towards such equilibrium. If supply exceeds demand, growing inventories of unsold products and manufacturers cut production and (or) lower prices. The classical model describes the behavior in the long run. In this model, the total supply corresponds to the volume of production at full employment of resources that is equal to the potential output. Prices, nominal wages are flexible, and maintain a balance changes at the macro level. In this model, an increase in aggregate demand under the influence of loose monetary policy will only lead to an increase in the general price level. Aggregate supply curve is more controversial ...