Keynes and the Classical Economists
6500 WordsOct 6th, 201026 Pages
Keynes and the Classical Economists: The Early Debate on Policy Activism
LEAR N I NG OBJ ECTIVE S 1. Discuss why the classical economists believed that a market economy would automatically tend toward full employment. 2. Explain why Keynes rejected the views of the classical economists. 3. Compare the views of Keynes and the classical economists with regard to the proper role of government.
s you discovered in Chapter 10, unemployment and inflation impose costs on our society. Today, many Americans assume that it is the federal government’s responsibility to reduce those costs by combating unemployment and inflation when they occur. But the issue of government intervention to combat macroeconomic problems provokes sharp disagreement…show more content…
But the classical economists did not see saving as a problem. Saving would not cause a reduction in spending because businesses would borrow all
Keynes and The Classical Economists: The Early Debate on Policy Activism
Say’s Law: Supply Creates Its Own Demand aid for resou 0 is p rce $10 s
t on goods and
If all the income created in the act of producing output is spent by households, supply will have created its own demand, and all the output will be sold.
the saved money for investment—the purchase of capital goods, such as factories and machinery. Why were the classical economists so sure that the amount households wished to save would equal the amount businesses wanted to invest? Because of interest rates. In the classical model the interest rate is determined by the demand for and supply of loanable funds, money available to be borrowed. If households desired to save more than investors wanted to borrow, the surplus of funds would drive down the interest rate. Because the interest rate is both the reward households receive for saving and the price businesses pay to finance investment, a declining interest rate would both discourage saving and encourage investment. The interest rate would continue to fall until the amount that households wanted to save once again equaled the amount businesses desired to invest. At this equilibrium interest rate there would be no uninvested
Economics studies the monetary policy of a government and other information using mathematical or statistical calculations. Fiscal information is analyzed in order to make judgments and inferences from the information provided. There are two economic schools of thought which take different approaches to the economic study of monetary policy, consumer behavior and government spending. Basic Theory (Paragraph 2):
This paragraph outlines major some of the differences between Classical and Keynesian economic theories. Classical theorist were rooted in the concept of Laissez faire market which requires little to no government intervention and allows individuals to make decisions, unlike Keynesian economics, where the public and government is heavily involvement in the decision making process in regards to economics. Classical economists also used the value of objects to determine prices in the market unlike Keynesians who believed that the demand was what influenced the market. Keynesians also relies heavily on the theory that the nation’s monetary policy can affect a company’s economy. Government Spending (Paragraph 3):
Classical economists do not believe that government spending has a major impact on the nation’s economic growth, yet that consumer spending and business investments had more of an impact. Classical economists believed that government spending would stunt the economy’s growth by increasing the public sector and decreasing the private sector. In contrast, Keynesian economist did in fact believe that consumer spending and business investments helped the economy, but also believed that government spending played an important role in boosting and could possibly even take the place of the former and still continue to result in economic growth. Short vs. Long-term Affects (Paragraph 4):
Classical economists focused on creating long term solution for economic problems. They take into account the effects of inflation, government regulation, taxes. They also consider how current policies and new economic theory will distort the free market environment. Keynesian economics focus more on immediate results in economic theories. Keynesians focus on short-term needs as well as policies, and consider how the result can affect the economy immediately.