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Macro Economics - Essay Example

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Macro Economics Keynesian economics provided explanation for the problem of the Great Depression. The Great Depression of the year 1930 was the effect of the failure of aggregate demand in the economy according to Keynes. The loss of the confidence of the investors in the economy resulted in the fall of the market prices of stocks along with the subsequent fall in the investment purchases…
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Macro Economics
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Download file to see previous pages The focus shifts from expenditure to save more of the current income for future spending. Thus in reacting to this less expenditure on the part of the consumers and the investors the firm will lower their production resulting in less output. Reduction in the wage rate of the workers in this circumstance will not contribute to the elimination of the huge unemployment rate prevailing in the economy. Simultaneous decrease in the interest rates in the economy will also not succeed in returning the economy back in the original track (Gwartney, Stroup, Sobel and MacPherson, 228). Wages and interest rates are considered fixed in the Keynesian theory. According to the theory even if there is a decline in the wage rate a negative impact will be exerted on the economy through the reduction in income and hence reduction in aggregate demand. Keynesian theory rejects the view of the classical economists that market forces will bring back the system of full employment in the economy. Equilibrium in the economy will be reached when the total spending in the economy will be equal to the total output. Changes in output may drive the economy to a certain extent towards the equilibrium as opposed to price changes as suggested by the other stream of economists. ...Download file to see next pagesRead More
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