Question

1. Explain why economists who subscribe to classical theory think the economy is price-driven and those who subscribe to Keynesianism think the economy is income-driven?
2. Classical theory at its crux is the one belief that prices, wages and interest-rates are at equilibrium in the long run, all on their own. How come they’re all lumped together in this way?
3. Why is Say’s Law not applicable in a money economy?
4. Keynesians believe in a more managed economy, does this mean they don’t believe in capitalism?

Answer 1

Answer :

Explain why economists who subscribe to classical theory think the economy is price-driven and those who subscribe to Keynesianism think the economy is income-driven?

The classical time of economies covers over 100 years of economic idea. Classical economics can be followed to the pioneering works of Adam Smith. Smith introduced a thorough analysis of economic marvels dependent on the country of free market and activity guided by individual self interest in a Laissez - faire environment.

The market economy can be considered as price driven economy as in light of the fact that the choice with respect to investment , production and dissemination are guided by price signals made by the powers of demand and supply.

In the price driven economy, it energize free market, laissez - faire , private property rights etc..... At the point when we experience crafted by classical economist like Alfred Marshall (organizer of Neo classical school of economics ) presented the idea of producer surplus , consumer surplus , quasi rent and so forth which turns into an important component of price driven economy.

Be that as it may, when we go to the Keynesian economy the Income driven market can be seemed.John Maynard Keynes on his book"The General Theory of Employment ,Interest and Money" stressed that government spending turns into the critical factor that driven for Aggregate demand. This meant increase in spending would increases the demand in economy. He additionally pushed that government spend was important to keep up full employment .

In the price driven economy, government assumes just restricted job and concentrates more on companies and not the individuals.

Classical theory at its crux is the one belief that prices, wages and interest-rates are at equilibrium in the long run, all on their own. How come they’re all lumped together in this way?

Classicals accept that over the long run there will consistently be full employment in the economy . In short run unemployment may exist because of market anomalies and price , wage tenacity however in long run price , wage , interest are on the whole adaptable and alter all alone to arrive at full employment. Classical economists advocate the impact of undetectable hand or powers of supply and demand that acquires market harmony .

Classical economists accept that when reserve funds is more prominent than investment, interest rates will fall, with the goal that financial specialists begin to demand a greater amount of accessible investment funds . Consequently, an increase in reserve funds will prompt an increase in investment consumptions through a decrease of the interest rate, and the economy will consistently come back to the natural level of real GDP. The flexibility of the interest rate just as other prices goes about as the self‐adjusting mechanism of the classical theory that keeps the real GDP consistently at its natural level.

Additionally, flexibility of the wage rate keeps the labor market in harmony constantly. Classicals just have confidence in voluntary unemployment , no market caused unemployment in long run .

Why is Say’s Law not applicable in a money economy?

In a money market system if some income happens not to be expended promptly it will enter the market money as a sparing This sparing will be returned to the economy as investment. As indicated by Jean Baptiste say[classical economist], state's law or law of market concentrated on the production of the item that makes demand . He bolster the convention of laissez - faire and he conviction that an entrepreneur economy will naturally tend towards full employment without the government mediation. However, in money market , it centers around govt mediation . so we can say that state's law isn't appropriate in money economy.

Keynesians believe in a more managed economy, does this mean they don’t believe in capitalism?

Keynesians accept that during recession an expansionary fiscal policy is important to rescue the economy of the emergency . A few wages and prices are unbending and don't alter automatically. Keynesians have confidence in government intervention, borrowing and fiscal policies and likewise existance of unemployment at balance . Keynesians state that an economy probably won't accomplish balance or expected GDP all alone . This is outer management of economy by the government . However, this doesn't mean they advocate command economy . They put stock in capitalism to run the economic powers of demand and supply .

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