Introduction to economics

[ Introduction to economics

Question-1

a) The classical economics stresses on the value of the market system. Classical economists are of the point of view that prices and wages ultimately will return to the “prerecession” era, so there is no point in making an effort about it. It emphasizes that Aggregate demand and aggregate supply are relatively simple. Markets are bound to return at the level of normalcy. Classical theory believes that unemployment cannot sustain in the economy for the long time. IN recession, it is a commonality that consumers stop spending, thus they increase their saving correspondingly. This increase in saving will drive the interest rate down, increase the capital investment, and thus the lack of consumption is balanced by eventual increase in investment level (Wu et al, 2002, p.36).

The notion is that Aggregate Demand is stable in. This implies that even if there are shocks in the economy eventually it will quickly adjust to the normal level. Even if we look at the way wage market will operate, due to the price decline, wage earners will be content taking lower wages.

b) On the contrary to the classical set of beliefs, Keynes proposed that during recessions, people are more apprehensive about their spending, and thus they hold back their spending. This lack of consumption and activity might worsen the economic productivity. As per Keynes, the best way to come out of this is to spend more Government spending. Government can pump money into the economy by building roads and spending on infrastructure. This is the complete opposite of what Classical theory proposed.

Keynes completely overturned this notion that ultimately economy will return to its “full employment level”. Keynes proposed that economic activity is determined by Aggregate Demand. The faltering demand might lead to recession and hi level of unemployment. This was the tactic that did wonders for the economy after the Great Depression of 1930's. Keynes does not really disregard free market the way Classical goes for the Laissez Faire concept. There are other two assumptions of Keynesian model (Downward & Mearman, 2002, p.415), the stickiness of the price level and wage rates. Keynes does not believe in the idea of that market self corrects itself. Instead Government has to pour money into the economy to stimulate the productivity and activity.

Question-2

Although it is a common notion that Minimum Wage is good for the welfare of the society. There is also a notion of helping poor people out when we talk about the minimum wage. But if minimum wage is increases, to a certain amount, lets analyze the effects of minimum wage. Suppose the minimum wage rate is $ 100. This policy sound like it is actually helping the poor, but it is completely opposite in actuality. Businesses do not respond in a very nice manner. They will ultimately starting laying the people off from thier jobs. From business perspective, the productivity that any employ brings into the firm must evaluate its ...