Microeconomics - Term Paper Example

The saving-investment is derived twice in this report once in the simplest way and then by adding other components of savings. The second part of this report delved into the aggregate demand and supply side of Keynesian economics. The Keynesian aggregate supply curve is studied in details. A typical Keynesian AS curve is reverse L-shaped with a sharp connecting point. However the newer version or the New Keynesian AS curve is also a reverse L-shaped with positive slope and rounded connecting corners.

Different types of macro models emerged at different points of time in the history of economic development. Simple Keynesian model is the static demand side model used to predict values of the macro variables as well as for analysing the effect of Government policies. It claims that these variables like output and employment are determined by the level of effective aggregate demand in the economy. It also claims that through fiscal and monetary policy intervention, the Government can increase the level of demand and thereby increase aggregate output and employment in the economy.

The Keynesian economists emerged after the Great Depression of 1929 following which there was a sustained period of unemployment of labour and under-capacity utilization. Keynesian economists explained how under certain circumstances absence of sufficient demand for produced goods and services may cause underemployment equilibrium i.e. a level of output and employment from which there is no tendency to change though both labour and machines are unemployed. It basically questioned the classical faith that the market will always ensure that whatever is produced will be demanded in the aggregate.

Keynesian economists as a corollary argued that if the Government through fiscal and monetary measures can increase the level of demand, full employment of resources might be ensured. Most market economies followed the Keynesian