Econ215HWAssignment2 - Alexa Angelone Professor Debora 1 Homework Assignment 2 Econ 215-Money Banking Classical Theory and Keynesian Theory differ from

Econ215HWAssignment2 - Alexa Angelone Professor Debora 1...

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Alexa AngeloneHomework Assignment # 2Professor DeboraEcon 215 -Money & Banking1) Classical Theory and Keynesian Theory differ from each other. Classical Theory says that one part of the economy will adjust and the equilibrium will go back, but Keynesian Theory says that markets could fail. In the Classical Theory, we find that there are three variations of how money is measured. One variation is the “Equation of Exchange”, where money is related to transactions velocity, the price on the transactions, and the number of transactions. The second way is an income based variations where relates money to income, along with the velocity of money and price. The last variation is the Cambridge Approach, where we see that the fraction of spending that is made in money balances. We learn that the role of money is neutral. Money has only one effect and it is on pricing. More demand than supply will lead to a need for production and more supply than demand will lead to a need to reduce production and lower prices. The Classical Theory says that there is a point where they meet, but that money only affects prices.John Meynard Keynes came up with a theory we refer to as Keynesian Theory. He did not believe in the long run because he said that in the long run, we are all dead. He also stated that there is no such thing as government creating jobs, but that government could create a job friendly environment. In this money demand theory, there is a demand for cash and “bonds”. By this theory, when interest rates are high, demand for bonds is high and demand for cash is low. When interest rates are low, demand for bonds is low and demand for cash is high. In extreme circumstances, Keynes designed a 1

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