Economics Neo Classical and Keynessian

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Cardiff Business School

COURSEWORK COVER SHEET 2012/2013

Section 1 (to be completed by the student)

|Student Name: |Lauren Gregory | |Student Number: |1226458 | |Module Code: |BS1547 | |Module Title: |Introduction to Economics | |Coursework Title: |Coursework 2 - Macro | |Submission date: |11th March 2013 | |(before 10am on…) | | |COMMENTS: | |--- | | | | | | |

Historically macroeconomics was divided into two theories. The Neo-classical approach which became apparent in the 18th-19th century with Adam Smiths “Invisible hand” model making assumptions that individuals seek to maximize utility, firms wanting to maximise profits and people act independently on the basis of full and relevant information. Following this theory was Keynes’ analysis in the General Theory which became the foundation for modern macroeconomics and a powerful influence on public policy in the years following World War II.

Classical economists believed that although occasional deviations from full employment result from economic and political events, adjustments in market prices, wages, and interest rates will restore the economy to full employment. Neo-clasiscal economists stand by Says Law stating there can be no demand without supply, he believes that supply creates it’s own demand. Neo-classists theory gives the central role in growth around technology whereas Keynes states that it is the expectation rather than the technology which is the main component which shifts aggregate demand and supply. In contrast to Says Law, Keynes disagreed and said supply is capable of outstripping demand, with the result that goods remain unsold, and production and employment are correspondingly cut back. (academia.edu)

Neo-classists go by the Marshallian market clearing mechanism, regarding the assumptions of consumers acting rationally and seeking utility maximization in order to achieve maximum satisfaction. Neo-classists suggest that supply is shifting and drives everything as long as prices and wages are flexible, the market will clear as the economy can adjust quickly which will balance supply and demand. The economy will self correct following shocks of oversupply or excess demand. However, Keynesians say that people aren’t rational and you can’t automatically shift prices, he says prices and wages are sticky and not so flexible, this prevents the economies resources from being fully employed and the economy returning to its natural level of GDP. The Keynesian sticky wage model is essentially built to accommodate demand shocks which can have considerable effects on output as Keynes believes the...
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