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Introduction to Macroeconomics - Essay Example

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In the essay 'Introduction to Macroeconomics' on macroeconomics, the following points are considered: in a closed economy, goods can be at market equilibrium yet large degree of unemployment, Keynes’ proposed solution: monetary and fiscal policy for cyclical unemployment. problems and limitation of Keynes’ proposed solution…
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Introduction to Macroeconomics
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Download file to see previous pages However, during recessions, when the unemployment rate rises, the demand will still be met by the supply, although the demand level will be lower. This is why in the goods market prices and quantity will settle at the equilibrium but high unemployment can still be present in the economy. This has been termed as the “Keynesian unemployment”.
As what has been described earlier, in determining output to meet the demands, there are two views—the Keynesian and the classical view. The classical view argues that prices and wages are flexible, in such a way that excesses in either demand or supply will quickly be absorbed by the economy and resume full employment of resources after economic shocks—or abrupt changes in the aggregate demand and supply curves. The Keynesian view on the other hand argues, as apparent in its sticky theory of prices and wages which says that these two factors are sticky in the short run because of contractual rigidities such as agreements made with different interest groups such as the labor unions. In the latter situation, the one proposed by Keynes, higher levels of aggregate demands are needed for output to respond positively because the aggregate supply curve is relatively flat especially when output levels are low. In this situation, the economy can have long periods of unemployment because prices and wages are slow to adjust to shocks, and reaching full employment of resources is slow to reach.
When classical economists argue that unemployment results from the interaction of the labor demand and supply curves, and lowering the wages will spread the labor supply which can curb unemployment in the process, Keynes argues that such is not applicable when unemployment is due to business cycle downturns, when because of lower demands of products in the economy, demand for labor is also low.
The lower demand for goods results in lower demands for labor.  ...Download file to see next pagesRead More
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