Macro

Introduction

In Keynes's theory, spending is directed to one person's income and the spending of that one person's income affects the supporting income of the other person. This cycle continues and helps maintain the normal functioning of the economy. During a depression the general public witnesses the natural reaction of people is to save money. Keynes's theory prevented the circular flow of money to keep the economy to a standstill.

Neoclassical economic theory is the term used for a variety of approaches to economics, the major focus of which is on pricing, products and income distribution in markets through supply and demand, which is often mediated by the hypothesis of utility maximization of people with limited income and limited income benefits and for the companies that use the available information and factors of production, according to the theory of rational choice (Aschauer, 1989, 177-200).

Neoclassical economics dominates microeconomics, and together with Keynesian economics of the neoclassical synthesis, which is dominated by mainstream economics today.

The Neo Classical economists believed that if the economy was left on its own, then it would definitely tend to meet employment equilibrium. This would only happen if the labour market worked properly. If there was any unemployment, then the following would happen:

Unemployment (a surplus of labour)

Fall in wages

Increased demand for labour

Equilibrium restored at full employment

Discussion

Keynes' provided the solution to deal with the bad economic situation. When priming the pump, Keynes argued that government should intervene to increase spending, either by increasing the money supply, or actually buy things in the market. During the Great Depression, however, is not a popular decision.

As supporters of Keynesian economics for the public sector to intervene to help the economy as a whole, it differs significantly from the popular economic thought, what preceded it - skip-fair capitalism. More acceptable offer, check-fair capitalism supports the exclusion of the public sector in the market. It was believed that unrestricted market will reach balance by itself. Proponents of free market capitalism, including the Austrian school of economic thought, one of the first of its founder, Friedrich von Hayek, also lived in England since Keynes. The two public rivalries over the years has become opposing because of the opposing views on the role of government in economic life (Buchanan, 1977, 85-109).

Keynesians show that they believe the economy can settle at any equilibrium. This means that recommended that the government actively participates in the economy to control the level of demand. Here are surprised to learn that such a policy, known as demand management policies.

Demand management tool, which regulates the level of demand to try to ensure that the economy reaches full employment equilibrium. If there is a lack of demand, as in a recession (deflationary gap), then the government will inflate the economy. If there is excess demand, as in the heyday, the government will have to deflate the economy (Delong, 2000, 83-94).

Classical theories mainly focus on roles that markets play in the economy. If the free labour market prevents the rapid compensation the economy will thrive. The government ...