Question

In: Economics

Identify key assumption underlying Keynesian and Classical approaches to macroeconomic analysis. In your answer identify how...

Identify key assumption underlying Keynesian and Classical approaches to macroeconomic analysis. In your answer identify how Keynesian and Classical economists differ regarding understanding about the business cycle and how the economy should best be managed?

At the end of your answer to Part 2 state the word count. Your answer to Part 2 should not exceed 150 words.

Solutions

Expert Solution

Assumption underlying Keynesian theory :-

1.) Keynesian theory believes that the government should intervene to stimulate bthe economy because after smooth running of economy there comes hurdles and when the business or economy faces tough time, the government can help them out.

2.) Keynesian theory focuses more on people being employed rather than about inflation. It believes that the worker have the ability to work and contribute to the society.

3.) Keynesian theory focuses more on the short term problem to ensure long term growth of the economy.

Assumption underlying classical approach :-

1.) Classical theory believes that government should not intervene and should set the market free so that they could regulate themselves alone. Everyone has the right to pursue their own interest whether it is based on services or demands.

2.) Classical theory believes more about the inflation and little less about the unemployment. They believe that inflation has a greater threat for long term growth of economy.

3.) Classical theory focuses more on long term problems because it believes that short term problem could be solved even by themselves. ( 150 words)


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