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1. Full employment is not normal feature 2. Unemployment equilibrium is normal. 3. Short Run Theory : Amount of Capital, Population, labour Force, Technology, do not change.
In the short run, higher level of income and employment can be attained by injection of macro economic measures which will lead to increase in aggregate demand for goods and services.
Agg. Supply Price : Total amount of money which all entrepreneurs taken together must expect to receive from the sale of output produced by given number of Labourers.
Equilibrium Determination
The equilibrium between ADP and ASP is established at the point where two curves intersect each other. Here proceeds expected is just equal to the level which induce firms to offer that employment.
Aggregate Demand Function (AD=total exp=C+I) aggregate supply function. As=F(N) AS is the aggregate supply price N=number of workers employed.
KEYNES ON CLASSICALS
Income saved does not necessarily Create Demand=AD<AS Investment demand < Desired savings causes unemployment Factors determining Savings and investment are different.
Savings depends on income, old age, social security network, education, marriage of children, housing need etc.
Investment
depends
upon (a) Expected rate of profit. (b) Rate of interest. (c) Technological progress (d) Population growth
_Wage reduction of general nature may not bring full employment _Wages determine both the cost of production and also level of income of people. _One mans exp is another mans income. Reduction in wages leads to fall in aggregate demand.
Even when wage rates are perfectly flexible, unemployment will prevail in the economy if aggregate demand is deficient. Classical economics is relevant for individual industry and firm analysis, valid for partial equilibrium and not general equilibrium. Capitalist economy can not automatically attain a state of full employment. Govt. has to play a pro-active role through monetary policy, fiscal policy, and other economic policies.
Classicals stood for Laissez faire policy; Keynes for active govt. intervention and Important role for money supply in carrying out corrections in aggregate demand.
Comparison Between Classicals and Keynesians Classicals Keynasians Economy is always in Full employment full employment. equilibrium is an exception. Wage and interest General reduction in flexibilities restores wages throughout the full employment economy can lead to equilibrium, if fall in demand. disturbed.
may Inflation will arise only after full employment has been achieved.
Interest rate brings about Savings & investment is equality between Savings influenced by level of income and investment and expected return on investment.
of be
Classicals depend on monetary policy for raising the level of income employment etc.
Keynesians depend on Fiscal Policy (public expenditure, deficit financing) for reaching full employment equilibrium. Classicals place Keynes treats supply great emphasis on (Y) as given and supply side for attaches great establishing significance to equilibrium. demand.
S & I decisions are made by same group of people and interest rate brings about equality between the investment and savings.
S & I decisions are taken by different groups of people changes in the economy are the result of changes in income and expenditure and not the rate of interest. Works in short run All are dead in the long run
Three ways to bridge the gap between income and consumption are: (a)Fiscal relief's to consumers and investors. (b)Easy availability of credit at lower interest rates. (c)Government investments in
Conclusion _The great depression of 1930s destroyed the belief in says law. _1.5 crore workers were unemployed. _General glut in the economy particularly U.S economy. _Says law does not provide explanation for rise and fall of employment.
Empirically researches have found that investment in capital goods does tend to rise when the stock market rises and to fall when the market falls, although the relationship is not always strong. Limitation : In practice, stock prices reflect many assets besides capital, such as the patents a firm holds or the reputation of a firms products. Thus changes in stock prices are imperfect measure of the changes in the market value of capital.
Reduce taxation - direct taxes and indirect taxes to give a boost to demand Increase in government expenditure to push up the demand. Choose projects having greater intensity of labour per unit of output. Focus on supply of wage goods.
Aggregate supply refers to the total quantity of goods and services that the nations business willingly produce and sell in a given period
aggregate supply would depend on available of (a)Capital, Labour and Technology (b)Price level and costs (c)Potential output In general, business would like to sell more if prices keep on rising and give them higher profits
Aggregate Demand: Aggregate demand refers to total amount of money that different sector of the economy willingly spend in a given period It is the sum of spending by consumers, business and governments and it depends on the level of prices as well as on Monetary, Fiscal policy and other factors