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3 views

Lec#1 B

Uploaded by

hackerrdani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Classical Economics

According to the classical economists :


1. Close Economy or no foreign trade
2. Full Employment.
3. No govt. intervention or Laissez-faire
economy.
4. Prices are flexible.
5. Perfect Competition
6. Supply creates its own Demand
Explanation
•There is full employment in the economy, every job seeker gets the
job in accordance with his capabilities and there is never involuntary
unemployment. Moreover, the resources of the economy are fully
employed.

•The classical economists believed in Laissez-faire economy , there


should be no government intervention in the economic affairs.

•In other word, the classical believed in the free enterprise economy.
It is told that the classical economists never presented their model in
a refined form.

•However, the credit goes to modern economists who integrated


classical ideas.
The classical model has two pillars.

• Say’s Law of Market


• Quantity Theory of Money.
• The say’s law is concerned with the real sector
or production sector of the economy.
• While quantity theory is linked with the
classical views regarding labor market and
credit are also presented.
Four markets classical model
All such means the classical model is explained
with the help of four markets of the economy:
• Goods market
• Credit market
• Labor market
• Money Market.
The Birth of Macroeconomics
• The classical economics of full employment
and laissez-faire economy fair economy
collapsed during 1930’s “Great Depression”
when millions of people were wandering in
the streets of “London and New York” in
search of jobs but they failed to get it.
• Keynes wrote his book “general theory” in
1936 where he not only rejected the classical
theory of full employment but also presented
his own theory of income and employment.
Keynesian Economics
a) According to Keynes, the level of income and
employment is determined where Aggregate demands
(AD) is equal to the Aggregate Supply (AS) of the
economy.
b) But such equilibrium level of national income may be:
c) at full employment, may be at above full
employment or may be at below full employment.
d) If at the level of full employment AD>AS, it will result in
inflationary gap.
e) Opposite to classical economists, Keynes identified the
inflation and unemployment. To remove the both, he
suggested for government intervention.
Hicksian Macroeconomics

1. Keynes did not consider the role of rate of interest in the


determination of national income.
2. Keeping in view ‘John Hicks’ presented the concept of “IS
Curve” showing general equilibrium in the goods market.
3. In such curve he established a relationship between rate of
interest and national income through equality of savings and
investment.
4. Again, he also presented the concept of LM Curve showing
general equilibrium in the money market.
5. In such curve he established a relationship between rate of
interest and national income through equality of demand for
money and supply of money.
6. Then with the help of IS and LM curves. Hicks presented the
simultaneous equilibrium in goods and money markets
Modern Macroeconomics

• In Keynesian theory of income and employment, the


concepts of AD and AS have been presented. But he did not
relate AS to the level of prices.
• Thus, because of such deficiency, the modern economists
linked the AD and AS to the level of prices.
• Then with the help of Classical and Keynesian assumptions,
the modern AS curve showing relationship between price
level and output have been derived.
• Again, the modern AD curve showing a relationship between
price level and aggregate expenditures has been derived.
• Finally with AD and AS curves equilibrium level of price and
output is shown in the framework of modern
macroeconomics.
Goals & instruments of Macroeconomic
Policy
Objectives: • Instruments:
• Output Monetary Policy
High level and rapid growth Control of money supply
• Employment affecting interest rates
High level of employment
with low involuntary Fiscal Policy
unemployment Government expenditure
• Price–level Stability Taxation

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