Just give extra information and add to what I have already have. Question: Compa
ID: 362359 • Letter: J
Question
Just give extra information and add to what I have already have.
Question: Compare and contrast key aspects which would impact business operations during a time when Classical economics was the prevailing theory and when Keynesian economics was the prevailing theory
The topic is about the Classical and Keynesian aggregate supply and employment.
The classical and Keynesian economics had a key difference in their nature of aggregate supply curve. The classical economist believes that the aggregate supply curve is a vertical straight line because they believed in Says law and flexibility of wages, price, and interest rates. Whenever the economy witnessed an excess supply of labor the wages automatically adjust and falls down. Any employee not ready to provide their service at the lower wages will not be considered as unemployed but voluntarily not working. Similarly, whenever the economy faced a shortage of labor the wages adjusted quickly and increased. Because of this, the Aggregate supply curve of the classical economist was an inelastic curve as shown in the figure below. IN the above graph as the price level fell from P to P' the wages, price of goods and other input costs also fall in the same proportion so that real wage, interest, and other factors remained the same and the level of national output and employment remains at full employment level. On the other hand, Keynesian economist produced a contrasting view according to them the short-run aggregate supply curve is a perfectly elastic curve (horizontal straight line) at levels of output below full employment. After reaching full employment level it is similar to the classical view and becomes a vertical straight line. According to Keynes the workers suffer from money illusion and do not perceive the change in the real wage, but any change in nominal wage affects them hence, nominal wages are sticky downward. They claimed unless the economy reached the full employment level the supply curve remains flat and people are ready to work at the given wage. After reaching the full employment. The below figure will explain it further. In the figure given above, at the price level P' the economy has an output of Y" which is below full employment level the economy will not experience any increase in wages unless the economy reaches full employment level at YF. From that point onwards any increase in price level have the same effect as in classical economics. According to Keynes any increase in the supply of labor will not be employed unless the firm increases the price and reduce the real wages. Whereas in the classical economy there was an automatic fall in wage rates. Where classical economist believed in flexible wages and interest rates in the economy the Keynesian claimed the wages where sticky downward and reduction in wages were resisted by the employees. The supply curve because of the flexible market was a vertical straight line for the classical and because of rigid wages and prevalent unemployment at the time of recession, it was a horizontal line for Keynesian before reaching the full employment level. Though both the schools agreed that the aggregate supply line will be a straight line after reaching full employment.
Explanation / Answer
Classical model is considered to be old model .In the classical model supply of labour is assumed to be a function of real wages of labour rate and the money obtained in the wage rate is assumed to be as flexible in both directions. But at the same time, in the Keynesian model, which is more advanced than the classical model the supply of labour is assumed to be a direct function of the money obtained through wage rate which is taken as an inflexible factor at least in the downward direction.Speculative or time value of money is Keynesian innovation.Keynes assumed like incomes is the main dependant factor rather thane the interest. Clasical models considred money demand as purely a function based on income. At the same time Keynesian models consider mondey demand as a function of both level of incomed, medicum of exchange, store value of money.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.