Macro Assignment 2
1. If you were having a conversation with a Keynesian and a Classical economist, and the conversation turned to why the economy is experiencing high unemployment and what the government should do about it, how would each economist explain unemployment and what policies would each advocate?
Keynesian economist believe that long periods of high unemployment are a result of inadequate overall demand and feel government intervention is a key component of a prosperous economy. The school of thought sees unemployment as an aggregated demand and company profitability. One factor affects another in a sense. If wages are low then consumers have less money to spend which then turns to less of demand for products to be created which then leads to a decrease in investments and staff by employers, ultimately resulting in high unemployment. This supports the idea of cyclical unemployment. Unlike the classical economy, Keynesian focuses on the short run instead of the long run. Therefore to avoid this Keynesian economists support monetary and fiscal policy to stabilize the business cycle.
Classical economists feel that unemployment is affected by the disruptions in the supply and demand or market and feel that government intervention is not beneficial. According to this school of thought the economy is self regulating meaning that when the economy’s full resources are being used it can reach the natural level of real GDP. They believe that prices, wages and interest rates are flexible giving room to the economy to adjust properly to reach real GDP. Tools such as minimum wage, taxes and regulations are not supported. Ultimately the focus is on the long run and the economy will adjust itself according to the classical view.
2. "The Fed should simply increase the money supply at the same rate that the full employment economy grows, and the government should desist from any stabilizing urges." What school of thought would make this suggestion, and how do economists of that school
Keynesian economist believe that long periods of high unemployment are a result of inadequate overall demand and feel government intervention is a key component of a prosperous economy. The school of thought sees unemployment as an aggregated demand and company profitability. One factor affects another in a sense. If wages are low then consumers have less money to spend which then turns to less of demand for products to be created which then leads to a decrease in investments and staff by employers, ultimately resulting in high unemployment. This supports the idea of cyclical unemployment. Unlike the classical economy, Keynesian focuses on the short run instead of the long run. Therefore to avoid this Keynesian economists support monetary and fiscal policy to stabilize the business cycle.
Classical economists feel that unemployment is affected by the disruptions in the supply and demand or market and feel that government intervention is not beneficial. According to this school of thought the economy is self regulating meaning that when the economy’s full resources are being used it can reach the natural level of real GDP. They believe that prices, wages and interest rates are flexible giving room to the economy to adjust properly to reach real GDP. Tools such as minimum wage, taxes and regulations are not supported. Ultimately the focus is on the long run and the economy will adjust itself according to the classical view.
2. "The Fed should simply increase the money supply at the same rate that the full employment economy grows, and the government should desist from any stabilizing urges." What school of thought would make this suggestion, and how do economists of that school