Question

Please explain both questions in detail.

1) Why do economies grow in the long run? What factors explain differences in GDP per capita across countries?

2) Classic vs Keynesian Model. Explain the differences between assumptions, fiscal multipliers, etc.

Answer 1

1) Economies grow in the long run due to various factors like technological advancement leading to increase in productivity, increase in laborforce participation and demographic transformation. The differences in GDP per capita occurs due to many factors like saving rate, capital output ratio or productivity, population growth etc.

2) The classical model was based on the assumption that supply creates its own demand and the economy is always at full employment level of output. There is wage price flexibilty and government intervention is not required to bring economy to stability. Whereas in contrast to this theory, keynesian theory introduced after the failure of classical theory was based on the assumption that an economy is not always at full employment level of output and lies below it. Government intervention is required to bring economy to market equilibrium and wage price rigidities exists.