losteenager15
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can someone please simplify or explain keynsian and neoclassical LRAS
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vasmajor
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These are some notes I made with my econplusdal econ textbook, I have it on pdf PM if you need.
Monetarist/Classical
Classical theory explains that when demand for goods and services surpass productive capacity people will be willing to pay for more to get goods and services. This will drive the prices up resulting in inflation. The consumer's purchasing power will go down as result. Workers will in return demand for higher wages which drives cost of production up. In the end some workers will be laid off to reduce costs. This explains cyclical unemployment. When the inflation is corrected normal situation resumes but the cycle can happen again. In order to reduce unemployment levels, the classical theory, roots for the reduction of wages which will in turn reduce the costs of production. As a result, producers will produce cheaper goods and services to the consumers. However, the Keynesian theorists say that, government monetary and fiscal policies should be used. As these will reduce inflation and increase producers' ability to produce cheaper goods.
1) Free market proponents would argue that excessive government intervention In the form of an over generous benefits system encourages frictional, structural and seasonal unemployment and thus is a driver of the natural rate of unemployment. This is because a generous welfare state distorts incentives in the labour market away from work and towards remaining unemployed. As a consequence, individuals can afford to take as much time as they need to find suitable job and remaining out of work when seasons change, prolonging frictional and seasonal unemployment. Workers lack the inventive take jobs in areas they do not favour and or to become trained and attain necessary skills to get into work prolonging structural unemployment.
2) Free market proponents would also argue that excessive labour market regulation can increase and maintain a high level of structural unemployment. This is because strict hiring and firing laws and high minimum wages limit Incentives for firms to take risks when employing workers who don't have the requisite skills necessary for the job before employment. If such laws were lax, firms may decide to employ workers lacking skills at low wages in the hope to train them up. boost productivity and thus increase revenue for the company. If training is not successful, the worker can be fired quickly or continue to work at low wages. These incentives do not exist with high minimum wages and strict hiring and firing laws making it harder for the structurally unemployed to find work.
Milton Friedman: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Monetarists believe that in the short-term velocity (V) is fixed This is because the rate at which money circulates is determined by institutional factors, e.g. how often workers are paid does not change very much. Milton Friedman admitted it might vary a little but not very much so it can be treated as fixed
Monetarists also believe output Y is fixed. They state it may vary in the short run but not in the long run (because LRAS is inelastic and determined by supply-side factors.) Therefore, an increase in the Money Supply will lead to an increase in inflation.
Criticisms:
The link between the money supply and inflation is often very weak in practice. The velocity of circulation (V) is not stable but can vary significantly due to confidence, changes in the use of credit cards, decline in use of cash. Etc. The large increase in the monetary base following the 2009 recession did not cause any inflationary pressures. Why not target inflation directly? If you want to control inflation, it makes more sense to target inflation directly rather than through the intermediary of the money supply.


Keynesian
Frictional and cyclical UE: Keynes was of the opinion that unemployment results from difference between productive capacity and aggregate demand of any economy. when productive capacity is more than demand, the producers will reduce their output. This leads them to lay off some workers for a while resulting in frictional unemployment. Keynesian explains that the business cycle is accounting for unemployment that reoccurs throughout the business cycle. Therefore, models with clearing markets are of no use to this approach.
Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy, such as tax cuts to stimulate consumption and investment or direct increases in government spending that would shift the aggregate demand curve to the right. The other side of Keynesian policy occurs when the economy is operating above potential GDP. In this situation, unemployment is low, but inflationary rises in the price level are a concern. The Keynesian response would be contractionary fiscal policy, using tax increases or government spending cuts to shift AD to the left. The result would be downward pressure on the price level, but very little reduction in output or very little rise in unemployment. In the Keynesian economic model, too little aggregate demand brings unemployment and too much brings inflation. Thus, you can think of Keynesian economics as pursuing a “Goldilocks” level of aggregate demand: not too much, not too little, but what is just right.
1) Proponents of government would argue that the under provision of transport and affordable, high quality housing infrastructure in the free market is a driver of geographical immobility and thus the natural rate of unemployment. This is because transport infrastructure like roads and bridges are public goods whilst many others are merit goods like buses, trains and trams where no provision or inadequate provision would be the result left free market forces. Once more if housing infrastructure is of poor quality in areas of job vacancies or prices so high to exclude much of the population, those who are geographically immobile and therefore structurally unemployed and those who frictionally unemployed find it much harder to get into work given their limited search areas. Consequently, such economists would argue that more government intervention is necessary, funded through government borrowing if need be, to appropriately provide housing and transport infrastructure to reduce the natural rate.
2) Proponents of government would also argue that an under provision of adequate In work training schemes is a big contributor to the natural rate of unemployment by creating and maintaining structural unemployment. This is because left to the free market, In work training schemes would be under provided due to private firms ignoring existing and significant positive externalities of production. Therefore, a high and firm specific skill set is required from prospective employees either derived from work experience in a very similar firm or from high quality education if they are to be employed. Those who lack such skills will be structurally unemployed with real difficulty in attaining the job specific skills such firms desire. As a consequence, such economists would argue that government intervention in the form of in work training subsidies are needed for more of them to exist and thus encourage firms to take on workers who do not currently have the right skills but also to provide transferrable skills for those who ever find themselves to be unemployed.
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losteenager15
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(Original post by vasmajor)
These are some notes I made with my econplusdal econ textbook, I have it on pdf PM if you need.
Monetarist/Classical
Classical theory explains that when demand for goods and services surpass productive capacity people will be willing to pay for more to get goods and services. This will drive the prices up resulting in inflation. The consumer's purchasing power will go down as result. Workers will in return demand for higher wages which drives cost of production up. In the end some workers will be laid off to reduce costs. This explains cyclical unemployment. When the inflation is corrected normal situation resumes but the cycle can happen again. In order to reduce unemployment levels, the classical theory, roots for the reduction of wages which will in turn reduce the costs of production. As a result, producers will produce cheaper goods and services to the consumers. However, the Keynesian theorists say that, government monetary and fiscal policies should be used. As these will reduce inflation and increase producers' ability to produce cheaper goods.
1) Free market proponents would argue that excessive government intervention In the form of an over generous benefits system encourages frictional, structural and seasonal unemployment and thus is a driver of the natural rate of unemployment. This is because a generous welfare state distorts incentives in the labour market away from work and towards remaining unemployed. As a consequence, individuals can afford to take as much time as they need to find suitable job and remaining out of work when seasons change, prolonging frictional and seasonal unemployment. Workers lack the inventive take jobs in areas they do not favour and or to become trained and attain necessary skills to get into work prolonging structural unemployment.
2) Free market proponents would also argue that excessive labour market regulation can increase and maintain a high level of structural unemployment. This is because strict hiring and firing laws and high minimum wages limit Incentives for firms to take risks when employing workers who don't have the requisite skills necessary for the job before employment. If such laws were lax, firms may decide to employ workers lacking skills at low wages in the hope to train them up. boost productivity and thus increase revenue for the company. If training is not successful, the worker can be fired quickly or continue to work at low wages. These incentives do not exist with high minimum wages and strict hiring and firing laws making it harder for the structurally unemployed to find work.
Milton Friedman: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Monetarists believe that in the short-term velocity (V) is fixed This is because the rate at which money circulates is determined by institutional factors, e.g. how often workers are paid does not change very much. Milton Friedman admitted it might vary a little but not very much so it can be treated as fixed
Monetarists also believe output Y is fixed. They state it may vary in the short run but not in the long run (because LRAS is inelastic and determined by supply-side factors.) Therefore, an increase in the Money Supply will lead to an increase in inflation.
Criticisms:
The link between the money supply and inflation is often very weak in practice. The velocity of circulation (V) is not stable but can vary significantly due to confidence, changes in the use of credit cards, decline in use of cash. Etc. The large increase in the monetary base following the 2009 recession did not cause any inflationary pressures. Why not target inflation directly? If you want to control inflation, it makes more sense to target inflation directly rather than through the intermediary of the money supply.


Keynesian
Frictional and cyclical UE: Keynes was of the opinion that unemployment results from difference between productive capacity and aggregate demand of any economy. when productive capacity is more than demand, the producers will reduce their output. This leads them to lay off some workers for a while resulting in frictional unemployment. Keynesian explains that the business cycle is accounting for unemployment that reoccurs throughout the business cycle. Therefore, models with clearing markets are of no use to this approach.
Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy, such as tax cuts to stimulate consumption and investment or direct increases in government spending that would shift the aggregate demand curve to the right. The other side of Keynesian policy occurs when the economy is operating above potential GDP. In this situation, unemployment is low, but inflationary rises in the price level are a concern. The Keynesian response would be contractionary fiscal policy, using tax increases or government spending cuts to shift AD to the left. The result would be downward pressure on the price level, but very little reduction in output or very little rise in unemployment. In the Keynesian economic model, too little aggregate demand brings unemployment and too much brings inflation. Thus, you can think of Keynesian economics as pursuing a “Goldilocks” level of aggregate demand: not too much, not too little, but what is just right.
1) Proponents of government would argue that the under provision of transport and affordable, high quality housing infrastructure in the free market is a driver of geographical immobility and thus the natural rate of unemployment. This is because transport infrastructure like roads and bridges are public goods whilst many others are merit goods like buses, trains and trams where no provision or inadequate provision would be the result left free market forces. Once more if housing infrastructure is of poor quality in areas of job vacancies or prices so high to exclude much of the population, those who are geographically immobile and therefore structurally unemployed and those who frictionally unemployed find it much harder to get into work given their limited search areas. Consequently, such economists would argue that more government intervention is necessary, funded through government borrowing if need be, to appropriately provide housing and transport infrastructure to reduce the natural rate.
2) Proponents of government would also argue that an under provision of adequate In work training schemes is a big contributor to the natural rate of unemployment by creating and maintaining structural unemployment. This is because left to the free market, In work training schemes would be under provided due to private firms ignoring existing and significant positive externalities of production. Therefore, a high and firm specific skill set is required from prospective employees either derived from work experience in a very similar firm or from high quality education if they are to be employed. Those who lack such skills will be structurally unemployed with real difficulty in attaining the job specific skills such firms desire. As a consequence, such economists would argue that government intervention in the form of in work training subsidies are needed for more of them to exist and thus encourage firms to take on workers who do not currently have the right skills but also to provide transferrable skills for those who ever find themselves to be unemployed.
thanks, could i have the pdf please
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danishh0007
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(Original post by vasmajor)
These are some notes I made with my econplusdal econ textbook, I have it on pdf PM if you need.
Monetarist/Classical
Classical theory explains that when demand for goods and services surpass productive capacity people will be willing to pay for more to get goods and services. This will drive the prices up resulting in inflation. The consumer's purchasing power will go down as result. Workers will in return demand for higher wages which drives cost of production up. In the end some workers will be laid off to reduce costs. This explains cyclical unemployment. When the inflation is corrected normal situation resumes but the cycle can happen again. In order to reduce unemployment levels, the classical theory, roots for the reduction of wages which will in turn reduce the costs of production. As a result, producers will produce cheaper goods and services to the consumers. However, the Keynesian theorists say that, government monetary and fiscal policies should be used. As these will reduce inflation and increase producers' ability to produce cheaper goods.
1) Free market proponents would argue that excessive government intervention In the form of an over generous benefits system encourages frictional, structural and seasonal unemployment and thus is a driver of the natural rate of unemployment. This is because a generous welfare state distorts incentives in the labour market away from work and towards remaining unemployed. As a consequence, individuals can afford to take as much time as they need to find suitable job and remaining out of work when seasons change, prolonging frictional and seasonal unemployment. Workers lack the inventive take jobs in areas they do not favour and or to become trained and attain necessary skills to get into work prolonging structural unemployment.
2) Free market proponents would also argue that excessive labour market regulation can increase and maintain a high level of structural unemployment. This is because strict hiring and firing laws and high minimum wages limit Incentives for firms to take risks when employing workers who don't have the requisite skills necessary for the job before employment. If such laws were lax, firms may decide to employ workers lacking skills at low wages in the hope to train them up. boost productivity and thus increase revenue for the company. If training is not successful, the worker can be fired quickly or continue to work at low wages. These incentives do not exist with high minimum wages and strict hiring and firing laws making it harder for the structurally unemployed to find work.
Milton Friedman: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
Monetarists believe that in the short-term velocity (V) is fixed This is because the rate at which money circulates is determined by institutional factors, e.g. how often workers are paid does not change very much. Milton Friedman admitted it might vary a little but not very much so it can be treated as fixed
Monetarists also believe output Y is fixed. They state it may vary in the short run but not in the long run (because LRAS is inelastic and determined by supply-side factors.) Therefore, an increase in the Money Supply will lead to an increase in inflation.
Criticisms:
The link between the money supply and inflation is often very weak in practice. The velocity of circulation (V) is not stable but can vary significantly due to confidence, changes in the use of credit cards, decline in use of cash. Etc. The large increase in the monetary base following the 2009 recession did not cause any inflationary pressures. Why not target inflation directly? If you want to control inflation, it makes more sense to target inflation directly rather than through the intermediary of the money supply.


Keynesian
Frictional and cyclical UE: Keynes was of the opinion that unemployment results from difference between productive capacity and aggregate demand of any economy. when productive capacity is more than demand, the producers will reduce their output. This leads them to lay off some workers for a while resulting in frictional unemployment. Keynesian explains that the business cycle is accounting for unemployment that reoccurs throughout the business cycle. Therefore, models with clearing markets are of no use to this approach.
Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy, such as tax cuts to stimulate consumption and investment or direct increases in government spending that would shift the aggregate demand curve to the right. The other side of Keynesian policy occurs when the economy is operating above potential GDP. In this situation, unemployment is low, but inflationary rises in the price level are a concern. The Keynesian response would be contractionary fiscal policy, using tax increases or government spending cuts to shift AD to the left. The result would be downward pressure on the price level, but very little reduction in output or very little rise in unemployment. In the Keynesian economic model, too little aggregate demand brings unemployment and too much brings inflation. Thus, you can think of Keynesian economics as pursuing a “Goldilocks” level of aggregate demand: not too much, not too little, but what is just right.
1) Proponents of government would argue that the under provision of transport and affordable, high quality housing infrastructure in the free market is a driver of geographical immobility and thus the natural rate of unemployment. This is because transport infrastructure like roads and bridges are public goods whilst many others are merit goods like buses, trains and trams where no provision or inadequate provision would be the result left free market forces. Once more if housing infrastructure is of poor quality in areas of job vacancies or prices so high to exclude much of the population, those who are geographically immobile and therefore structurally unemployed and those who frictionally unemployed find it much harder to get into work given their limited search areas. Consequently, such economists would argue that more government intervention is necessary, funded through government borrowing if need be, to appropriately provide housing and transport infrastructure to reduce the natural rate.
2) Proponents of government would also argue that an under provision of adequate In work training schemes is a big contributor to the natural rate of unemployment by creating and maintaining structural unemployment. This is because left to the free market, In work training schemes would be under provided due to private firms ignoring existing and significant positive externalities of production. Therefore, a high and firm specific skill set is required from prospective employees either derived from work experience in a very similar firm or from high quality education if they are to be employed. Those who lack such skills will be structurally unemployed with real difficulty in attaining the job specific skills such firms desire. As a consequence, such economists would argue that government intervention in the form of in work training subsidies are needed for more of them to exist and thus encourage firms to take on workers who do not currently have the right skills but also to provide transferrable skills for those who ever find themselves to be unemployed.
Hey, can I have the pdf aswell
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