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Macro Economics - Assignment Example

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Both the two schools of thought believe the economy and nation comprises of consumer spending, government spending and business investment. However the Keynesian school of thought articulates…
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Macro Economics
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DD Month YYYY MACROECONOMICS Q1. There are two economics school of thought; Keynesian and ical schools of thought. Both the two schools of thought believe the economy and nation comprises of consumer spending, government spending and business investment. However the Keynesian school of thought articulates that government spending can improve the economy without the business investment and consumer spending. The two schools of thought takes various approach to the economic research on the monetary policy, government spending, and consumer behavior. Classical school of thought is rooted in the laissez-faire where the market is free from the government intervention (Nikaido, 540). It also provides individuals to act based on their self-interest regarding the decisions in the economy. This thought ensures that the economic resources are allocated based on the desires of businesses and individuals. The classical economists uses the value of money in determining the prices in the market.
On the other hand, the Keynesian school of thought depends on the aggregate demand and spending in defining the economic marketplace. The Keynesian economists believe that the private and public decisions influences the aggregate demand. Public decisions entails the municipalities and government agencies. Private decisions entails the businesses and the individuals found in the economic marketplace. Government spending is not one of the major forces in classical economic literature. Business investments and consumer spending represent the most important section of the country. Too much government expenses takes away the resources needed by businesses and individuals. On the contrary, the Keynesian economics relies on the government spending to jumpstart the nation (Nikaido, 546).
The classical school of thought focuses to create long term mitigation for economic problems. The issues on inflation, government taxes, and government regulations are the main agenda for the classical school of thought. The Keynesian school of thought focuses on the immediate outcome in the economic theories. The policies set by the Keynesians were short term and required instant corrections to the nation. This is the reason why government spending is the main cog in this school of thought. From the classical model graph, the aggregate supply curve is illustrated by the vertical line. From the Keynesian model, the aggregate supply curve slopes upwards based on the Keynesian school of thought. The two school of thought represents the aggregate supply and aggregate demand and they intersect at a point of equilibrium.
Keynesian Model
Classical Model:
Difference between the models:
Q2.
When the interest rates increases the private investment spending reduces. Under such circumstances, the initial rise in the total investment spending reduces resulting to a situation called crowding out effect. Sometimes, nations adopts stance on expansionary fiscal policy and increases their spending to boost the activities of the economy. This normally leads to a rise in interest rates thereby affecting the decisions of private investments. When the crowding out effect becomes too high the economy’s incomes becomes less. When the interests rates are higher, the investment capital increases and affects the mechanism of debt financing. This leads to few investment and crowds out the effect of the initial rise in the investment spending. Normally, the initial rise in the government spending is funded using taxes and government borrowing. The graphical representation of this crowding out effect is shown below.
Crowding Effect Graph:
Q3
a) Consuption Function
C=7000+0.94Y
Graphically
b) Kk
c)
MPC = 0.94
MPS=0.06
Therefore, multiplier will be =1/0.06
=16.67
The multiplier gets smaller with the rise in equilibrium. Therefore, the new equilibrium has a larger multiplier compared to the old equilibrium.
Reference
Nikaido, Hukukane. Transition From The Classical To The Keynesian Perspective. The European Journal of the History of Economic Thought 8.4 (2001): 526-546. Web. Read More
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