(1) Question :The Similarities Between Keynesian Economics And Classical

Economics

1. Savings:

Regardless of the classical economics concept, overlooking the matter that saving is an operation of
earnings, it acknowledges it as an operation of interest percentage. Thus, the resolution understands
that people do save for future consumption.It is the same as the Keynesian concept, which has a view
that when the interest ratio climbs up, the percentage of earnings will be smaller, thus making it hard
for individuals to save.

Besides, the two concepts recognize that individuals keep a certain percentage of disposable earnings
for later use without giving much thinking to the decrease in the worth of money.

2. Money Demand:

Both concepts give essential consideration to capital provision and demand for money as crucial
determinants that interfere with the percentage of interest in the economy.While classical gave much
consideration to borrowing reasons like stockpiling, the Keynesian concept depicts the aim of funds
provision and bank credit, which one cannot overlook as a factor of the proportion of interest.Keynes
considers money as a determinant concluding the percentage of interest. This symbolic alliance brings
both concepts together notwithstanding them having a contrasting viewpoint of the administration of
the economy by the nation

3. Capitalist Economy:

Both John Keynes and Adam Smith, who are the pioneers of both concepts, advocate and prefer the
presence of a capitalist economy over other types of economic theories like socialism and
communism.As regards this point of agreement, the two financial prodigies depict that a free market,
where the strength of demand and supply decide the value of commodities, is an effective means of
apportioning resources.

4. Effects of Technology in Job creation:

Both parties conclude that technology performs a vital role in regulating the cost of labor, the provision
of commodities, and the worth of goods and services in the market.

Keynes depicts that technology leads to a progressive decline in job creation while Adam Smith, in his
classical concept, states that application of technology leads to increase for work carried out while at
the same time decreasing the value of commodities due to efficiency and effectiveness given out in the
workplace.
(2) Question The Difference Between The Keynesian Economics And Classical
Economics

Greenwalk (1987) has identified great differences that exist between the
Keynesian economics and classical economics, and there are outline as follow.
Keynesian economics supports the active Classical economics is free-market economics; it
involvement of the government in managing the induces a policy that limits the involvement of the
economy, especially during recession or government in managing the economy.
depression.

Keynesian enthusiasts adopt policies that favor Classical economists do not concern themselves
governmental involvement. Their primary much about unemployment; much of their interest
emphasis focuses on creating more employment is in price inflation. They see inflation as one of the
than being concerned about inflation. Keynesians biggest hindrances to the growth of a long-lasting
are of the view that workers can contribute to the and robust economy. Classicists believe the
development of the economy using their inherent economy will always seek a level of full
individual abilities. employment, and that unemployment is as a result
of governmental interference in the free market.

Keynesians tend to focus more on solving short- Classicists are focused on achieving long-term
term problems. They believe that getting the results by allowing the free market to adjust to
government to address these issues immediately short-term problems. They see issues short-term
will enhance the long-term growth of the as just bumps on the road that will eventually
economy. dissolve on its own.

Keynesians believe that prices should be definite Classical supporters desire a free market, a market
and that the government should endeavor to that determines its standard of supply and
maintain price stability. They desire to see demand. They rely on the wants of consumers to
individuals and corporations influenced by the influence the fluctuation of prices and hold the
government to sustain prices within specified view that the market will adjust itself to any
ranges. surpluses or shortages of products.

Keynesians are in support of government debts. Classical economists do not support governmental
They firmly believe that governmental spendings spendings, and they also detest more government
increase aggregate demand in the economy. debts. They prefer a balanced budget because they
have a perspective that the economy doesn’t
derive benefits from higher governmental
spendings.
Keynesians describe money as an active force that Classicists completely ignored the precautionary
influences total output. They worry less about the and speculative motives for holding money. They
cost of goods or the purchasing power of the do not subscribe to the view that money could also
currency influence the rate of employment, output, and
income.

3.Question Describe how Keynesian economics and classical

Keynesians and New-Keynesianism declare employment and aggregate demand is what determines the
real wage.Consequently, real wage cannot be considered as a mechanism to adjust employment
anymore but labor
demand does .Keynesian enthusiasts favor government involvement and are more concerned about
people having jobs than they are about inflation. They see the role of workers as using their abilities to
contribute for the good of society. Keynesians do not worry about the cost of goods or the purchasing
power of the currency.(Lindbeck, 1987)

.Classical economists have some concerns about unemployment but are more worried about price
inflation. They see inflation as the biggest threat to a strong long-term growth of the economy.
Classicists believe the economy will always seek a level of full employment. They think unemployment
results from government interference in the free market or the existence of a monopoly in an
industry.Classical theory of unemployment affirms unemployment depends on the level of real wages. It
occurs when real wages are fixed over the equilibrium level because of rigidities provoked by minimum-
wage policies, union bargaining or effective salaries.

Accurately describe New development since 1980s that have change

The 1980s and Beyond: Advances in Macroeconomic Policy .The exercise of monetary and of
fiscal policy has changed dramatically in the last few decades.The Revolution in Monetary Policy It is fair
to say that the monetary policy revolution of the last two decades began on July 25, 1979. On that day,
President Jimmy Carter appointed Paul Volcker to be chairman of the Fed’s Board of Governors. Mr.
Volcker, with President Carter’s support, charted a new direction for the Fed. The new direction
damaged Mr. Carter politically but ultimately produced dramatic gains for the economy.Oil prices rose
sharply in 1979 as war broke out between Iran and Iraq. Such an increase would, by itself, shift the
short-run aggregate supply curve to the left, causing the price level to rise and real GDP to fall.

But expansionary fiscal and monetary policies had pushed aggregate demand up at the same time.
As a result, real GDP stayed at potential output, while the price level soared. The implicit price deflator
jumped 8.1%; the CPI rose 13.5%, the highest inflation rate recorded in the 20th century. Public opinion
polls in 1979 consistently showed that most people regarded inflation as the leading problem facing the
nation. Chairman Volcker charted a monetarist course of fixing the growth rate of the money supply at a
rate that would bring inflation down. After the high rates of money growth of the past, the policy was
sharply contractionary. Its first effects were to shift the aggregate demand curve to the left. Continued
oil price increases produced more leftward shifts in the shortrun aggregate supply curve, and the
economy suffered a recession in 1980. Inflation remained high. Figure 17.8 "The Fed’s Fight Against
Inflation" shows how the combined shifts in aggregate demand and short-run aggregate supply
produced a reduction in real GDP and an increase in the price level.on rate finally began to fall in 1981.
But the recession worsened. Unemployment soared, shooting above 10% late in the year. It was, up to
that point, the worst recession since the Great Depression. The inflation rate, though, fell sharply in
1982, and the Fed began to shift to a modestly expansionary policy in1983. But inflation had been licked.
Inflation, measured by the implicit price deflator, dropped to a 4.1% rate that year

New Keynesian economics emerged in the last three decades as the dominant school of
macroeconomic thought for two reasons. First, it successfully incorporated important monetarist and
new classical ideas into Keynesian economics. Second, developments in the 1980s and 1990s shook
economists’ confidence in the ability of the monetarist or the new classical school alone to explain
macroeconomic change.The sudden change in the relationship between the money stock and nominal
GDP has resulted partly from public policy. Deregulation of the banking industry in the early 1980s
produced sharp changes in the ways individuals dealt with money, thus changing the relationship of
money to economic activity. Banks have been freed to offer a wide range of financial alternatives to
their customers. Fitoussi ( 1980 )opined that One of the most important developments has been the
introduction of bond funds offered by banks.These funds allowed customers to earn the higher interest
rates paid by long-term bonds while at the same time being able to transfer funds easily into checking
accounts as needed. Balances in these bond funds are not counted as part of M2.

As people shifted assets out of M2 accounts and into bond funds, velocity rose. That changed the
once-close relationship between changes in the quantity of money and changes in nominal GDP.Many
monetarists have argued that the experience of the 1980s, 1990s, and 2000s reinforces their view that
the instability of velocity in the short run makes monetary policy an inappropriate tool for short-run
stabilization

References

Greenwald,“Keynesian, New Keynesian and New Classical Economics,” Oxford Economics Papers, No.
39, 1987, pp. 119-132.
Hall, “Market Struructure and Macroeconomic Fluctuations,” Brookings Papers on Economic
Activity1987, pp285-322.
J.-P. Fitoussi and E. S. Phelps, "Causes of the 1980s Slump in Europe," BPEA, 2:1986, pp. 487-513.

Keynesian Economics and the Economics of Keynes: A Study in Monetary Policy, 4th. ed., New York:
Oxford University Press Inc., 1973.
Lindbeck, Snower, “Wage Setting, Unemployment and Insider-Outsider Relations,” AER, No. 76, May
1987, pp. 235-239