Economics For Managers
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Chapter 14 : Classical and Keynesian Economics
The Classical Tradition
Say's Law of Markets
The Keynesian Revolution
Keynesian Approach Vs Classical Economics
The Monetarist Approach
The History of Monetarism
The Velocity of Money
The Quantity Theory of Prices
Modern Monetarism
Comparison of Monetarist and Keynesian Approaches
New-Classical Macro Economics
Rational Expectations
Supply-Side Economics
Factors Determining Economic Growth in
Supply-side Economics
Criticism
Chapter Summary
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In this chapter we examined the different schools of thought
in macro economics and the assumptions on which the economic theories are based.
According to the classical approach, prices and wages are flexible and the
economy is stable. The economy moves automatically and quickly to full
employment equilibrium without any government intervention.
The Keynesian approach on the other hand is based on the assumption that prices
and wages are inflexible and government needs to intervene to maintain stability
of business cycle. Monetarists believe that it is only money supply that affects
aggregate demand, output and prices whereas Keynesians argue that money helps in
output determination along with spending variables like fiscal policy and net
exports. |
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Keynesian economists, feel that output will
significantly change if there is a change in nominal demand but the
change in output will have very small effect on prices in the short
run. But Monetarists feel that a change in demand will change the
prices not the real output. The Neo-classical approach is based on
two assumptions: prices and wages are flexible and adjust quickly to
balance supply and demand; people's expectation are formed on the
basis of all available information and government cannot mislead
them as they are well informed and have access to all the
information about government's monetary and fiscal policies.
The early 1980s saw the emergence of a new school of thought that
emphasized the impact of aggregate supply on the economic growth of
nations. This new school of thought was called ‘supply-side
economics'. The supply-side economists believed that incentives and
tax-rates influence the economy's aggregate supply to a great
extent.
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