ECONOMICS, Keynesian theories - ECONOMICS Keynesian theories 1 Keynesian economics is the view of the economy where in the short-run especially

ECONOMICS, Keynesian theories - ECONOMICS Keynesian...

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ECONOMICS, Keynesian theories 1. Keynesian economics is the view of the economy where in the short-run, especially during recessions the economic output is strongly influenced by total spending of the economy, also known as aggregate demand. Classical economics on the other hand is defined to be, the study of market dynamics; describes the way markets and market economies work. Classical economics is concerned with changes in economic growth and it stresses economic freedom and promoted free competition within markets and laissez-faire markets (Palley, 22). The fundamental differences of classical and Keynesian theories are: Classical economics based their theory that the market was perfect and could stand on its own (self sustaining) and that no government mediation was required. Classical economists believe that too much government spending takes away valuable resources needed by businesses for investment. While the Keynesian economics describes that the market is imperfect and requires intervention from the government and that it is not self sustaining. Keynes argues that government spending improves the economy and can replace absence of consumer spending. Classical economist show that price level varies in response to changes in the quantity of money. Quantity theory of money seeks t o explain the value of money in terms of transformation in its amount. Keynesian economists discard the quantity theory of money; according to them under-utilization of resources and recession in the economy leads to substantial increase in real output and employment without affectively price level. Classical economics tends to resolve and give long-term solutions to the economic problems. Regulation of the government, effects of inflation and taxes plays an important role in the providence of solutions to the economic problems in the long term. Keynesian economies
focus on the providence of short term solutions to the economy problems; how economic policies can make instant corrections to a country (Miller, 45). 2. The multiplier effect can be described as the expansion of a country’s money supply due to banks ability to lend money. The percentage of bank deposits known as bank reserves influence the multiplier effect. It is money used to create more money and is calculated by dividing total bank deposits by the reserve needs. The multiplier effect can also be described by the fact that one individual’s spending becomes someone else’s income and the second individual’s income is subsequently spent, becomes the income of other persons (third person) and the chain builds on.

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