ECONOMICS

Economics

Economics

Question1

How do main principles upon which neo-classical macroeconomic model is based explain equilibrium of economy?

The term neoclassical economics or neoclassical school is a vague concept used in economics, political science, etc., to refer generally to an economic approach based on an attempt to integrate the marginalist analysis from some of the insights of classical economics.

Economists consider the overall balance is an imaginary construction which can be useful for the study of particular problems, but does not describe any situation possible. General equilibrium tries to give an explanation encompassing the whole economy in a step upward. In contrast, macroeconomics called Keynesian adopts a top-down approach from that of aggregates larger. Since the merger by the microeconomic foundations, the line is blurring. However, many macroeconomic models do not consider that a "product market" and observe what such interactions with the financial market. In most cases, the general equilibrium models distinguish several markets of differentiated goods. Recent models are often very detailed and based on econometric grounds (Aspromourgos 1986, 265).

How have these principles been challenged by Keynesian school of thought?

Keynesianism is based on six main features of which three relate to the functioning of the economy and three economic policies. The three principles on the functioning of the economy are:

(1) The aggregate demand is erratic;

(2) Inflections in demand have a greater impact on output and employment than on price;

(3) Prices and especially wages respond slowly to changes in supply and demand.

From there, the Keynesians argue three principles of economic policy:

(1) The usual level of employment is not ideal because it is subject to both the vagaries of demand and price adjustments too slow,

(2) Where for some the need for Keynesian stabilization policies and

(3) So much less unanimous than the previous point, the Keynesians prefer policies to support employment to those to fight against inflation.

Question 2

Causes of unemployment in neo-classical theory

Economic equilibrium can the stable and unstable. Equilibrium is called stable if, in response to an external pulse, which destroys the balance, the economy itself is returned to a stable state. If, after forcing the economy they cannot recover on their own, the equilibrium is called unstable.

Imbalance means that in areas, sectors, industries no balance. This leads to a loss of gross domestic product, lower incomes, the emergence of inflation and unemployment. In order to achieve the equilibrium state of the economy and prevent adverse events, experts use macroeconomic equilibrium model, the conclusions of which serve to justify the macroeconomic policies of the state. Since the nineteenth century there was no unemployment benefits, then, according to representatives of the classical school, working, acting as rational economic agents would prefer to receive a lower income than not getting any. Nominal wage rate will fall to, and the labor market again restored full employment. Unemployment in the classical model is so voluntary, that is why it serves the cause of failure of the work for this gross wage. Thus, workers voluntarily resign themselves to the unemployed state (Antonietta 1987, ...