Micro economics essay

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Micro economics essay

It was his explanation for the cause of the Great Depression for which he was, deservedly, most well known. Although Keynesian theories no longer adhere to many of the points of Keynes' original or even later work, it is through their continuing change and development that they continue to hold sway today.

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Overview John Micro economics essay Keynes In John Maynard Keynes ' theory, some micro-level actions of individuals and firms—if taken collectively—can lead to aggregate macroeconomic outcomes in which the economy operates below its potential output and growth.

Such a situation had previously been referred to by classical economists as a general glut.

Micro economics essay

Following in Say's Lawthat supply creates its own demand, classical economists believed that a "general glut" would therefore be impossible. Keynes contended that a general glut would occur when aggregate demand for goods was insufficient, leading to an economic downturn.

This would lead to unnecessarily high unemployment and losses of potential output.

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Keynes asserted that unemployment can be readily cured through governmental deficit spending, and that inflation can be checked by means of government tax surpluses Rothbard In other words, he argued that government policies Micro economics essay be used to increase aggregate demand, thus increasing economic activity and reducing high unemployment and deflation.

The basic concept, used in his theory, is aggregate national income, which is defined as equal to the money value of the national output of goods and services during a given time period.

It is also equal to the aggregate of income received by individuals during the period including undistributed corporate profits. Keynes' macroeconomic theories were developed in the context of mass unemployment in s Britain and in s America.

Keynesian Model The fundamental equation of the Keynesian system is: Conversely, every act of expenditure by an individual results in an equivalent monetary income for someone else.

In every case, expenditures, and only expenditures, can create monetary income. Aggregate expenditures are classified into two basic types: Final expenditure for goods and services that have been produced during the period, which equals consumption.

Expenditure on the means of production of these goods, which equals investment. Thus, monetary income is created by decisions to spend, consisting of consumption decisions and investment decisions. This relationship between aggregate income and consumption is considered to be stable, fixed by the habits of consumers.

In the mathematics of Keynesian theory, aggregate consumption and therefore aggregate savings is a stable, passive function of income. This is known as the consumption function.

For example, according to the consumption function, we can say consumption equals 90 percent of income. Thus, savings would be equal to 10 percent of income. Consumption expenditures are, therefore, passively determined by the level of national income.

Investment expenditures, however, are, according to Keynes, effected independently of the national income Rothbard Similarly, a decrease in independent expenditures will lead to a ten-fold drop in income. This "multiplier" effect on income will be achieved by any type of independent expenditure—whether private investment or government deficit such as foreign trade problems.

Therefore, government deficits and private investment have the same economic effect. The consumption function and therefore the savings function is assumed to be constant throughout while the level of investment is constant at least until equilibrium is reached.

This assumption implies that: The existing state of all techniques, the existing efficiency, quantity, and distribution of all labor, the existing quantity and quality of all equipment, the existing distribution of national income, the existing structure of relative prices, the existing money wage rates, and the existing structure of consumer tastes, natural resources, and economic and political institutions are constant too Rothbard From this it follows that for every level of national income, there corresponds a unique, definite volume of employment.

The higher the national income, the greater will be the volume of employment, until a state of "full employment" is reached. After the full-employment level is reached, a higher money income will represent only a rise in prices, with no rise in physical output real income and employment.

Also, income below this "full-employment" level will signify large-scale unemployment; an income above will mean high price inflation. There is no reason whatsoever to assume that this equilibrium level of income determined in the free market will coincide with the "full-employment" income level.

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