Coursework 2- Macro

Coursework 2- Macro

Coursework 2- Macro

Question

There are two approaches used by the economists in order to find out the effect on these approaches on the people and the economy of a country. Among the two approaches the oldest one is neo-classical approach and it was greatly criticized by the Keynesian economic approaches. There is a huge difference between the thoughts and approaches of the two views. According to neo-classical approach a free market can operate independently if there is no human intervention. They have emphasized on the fact that there is an invisible hand that automatically creates an equilibrium situation, thus they believed that division of labour and free market will automatically tend towards an equilibrium situation as per the interest of the public. The neo-classical approach also gave three assumptions according to which a market operates independently and creates an equilibrium position.

These three assumptions are: 1) the prices of labour, commodities, rent and etc. are easily mobile either upwards or downwards. According to the observation prices are more flexible upwards instead of going downwards due to different factors.

2) Secondly they assumed that supply creates its own demands which mean that if a product is produced then it has to be bought. This assumption does not work today as in many countries production depends upon demand. 3) They gave the assumption that household savings of individuals is equal to capital investment. The neo-classical economists also gave their view regarding unemployment in the economy. According to them this is just a temporary disequilibrium which will resolve automatically through the self-correcting mechanism of the economy.

On the other hand Keynesian economists gave their own views which clearly reflect the differences between the two schools of thoughts. Keynesian gave a much realistic view that there no invisible hands that can resolve the economic difficulties. They believed that government intervention is necessary in order to ensure economic growth and stability in an economy. Like neo-classical school of thought Keynesian is also based on some key assumptions. These assumptions are: 1) Prices in an economy are rigid and inflexible as increase in prices take easily but the decline of prices show resistance and do not fall rapidly. The price reduction is reluctant in an economy either of wages, commodities, rent or any other thing. 2) They believed on the effective demand assumption which states that demand derives from the household incomes and if ...