CLASSICAL AND KEYNESIAN THEORIES.pptx - THE CORE...

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THE CORE MACROECONOMIC THEORIES CLASSICAL AND KEYNESIAN THEORIES AND DETERMINATION OF NATIONAL INCOME
MACROECONOMIC APPROACHES AND PATHWAYS The Three Main Schools of Thought The three main approaches to macroeconomics are based on three schools of thought : Classical macroeconomics Keynesian macroeconomics Monetarist macroeconomics
Classical Macroeconomics According to classical macroeconomics , the market economy works well and delivers the best available macroeconomic performance. Aggregate fluctuations are a natural consequence of an expanding economy with rising living standards. Government intervention can only hinder the ability of the market to allocate resources efficiently. MACROECONOMIC APPROACHES AND PATHWAYS
Classical macroeconomics fell into disrepute during the 1930s, which was a decade of high unemployment and stagnant production throughout the world. Great Depression is a decade (the 1930s) of high unemployment and stagnant production throughout the world economy. Classical macroeconomics predicted that the Great Depression would end but gave no method for ending it more quickly. MACROECONOMIC APPROACHES AND PATHWAYS
Keynesian Macroeconomics According to Keynesian macroeconomics , the market economy is inherently unstable and it requires active government intervention to achieve full employment and sustained economic growth. John Maynard Keynes, in his book “ The General Theory of Employment, Interest, and Money ,” began this school of thought. Keynes’ theory was that too little consumer spending and investment led to the Great Depression. MACROECONOMIC APPROACHES AND PATHWAYS
Keynes’ solution to depression and high unemployment was increased government spending. But Keynes predicted that his policy aimed at curing unemployment in the short term might increase it in the long term. This prediction became reality during the 1960s and 1970s, when inflation exploded, growth slowed, and unemployment increased. The global recession of 2008–2009 and fear of another great depression revived interest in Keynesian ideas. MACROECONOMIC APPROACHES AND PATHWAYS
MACROECONOMIC APPROACHES AND PATHWAYS Monetarist Macroeconomics According to monetarist macroeconomics , the classical view of the world is broadly correct, but in addition to fluctuations that arise from the normal functioning of an expanding economy, fluctuations in the quantity of money also generate the business cycle. A slowdown in the growth rate of money brings recession and a large decrease in the quantity of money brought the Great Depression.
Milton Friedman was the most prominent monetarist. The view that monetary contractions are the sole source of recessions is held by few economists today. But the view that the quantity of money plays a role in economic fluctuations is accepted by all economists and is part of today’s consensus. MACROECONOMIC APPROACHES AND PATHWAYS
Today’s Consensus Each of the earlier schools provides insights and

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