Macro Economics
If you were having a conversation with a Keynesian and a Classical economist, and the conversation turned to why the economy is experiencing high unemployment and what the government should do about it, how would each economist explain unemployment and what policies would each advocate?
If I were having a conversation about why the economy is experiencing high unemployment and what the government should do about it, with a Keynesian and a Classical economist I think that the economists would explain the situations in the following way and would support the following policies.
Classical economists promote the idea of two fundamental suggestions. The first is that wages equal the value that would be lost if employment were to diminish by one. The second is that unemployment changes in two categories. The first is defined as frictional unemployment. Frictional unemployment can be mainly explained by reasons based on inconsistent information. First, businesses intermittently try and balance their resources and with miscalculation and changes in demand they will increase or decrease the amount of employees they have. Also, people in-between jobs may not have enough information to find and select the right job. A classical economist would also describe voluntary unemployment. This type of unemployment occurs with the refusal or inability of workers to find jobs, due to legislation, social practices, collective bargaining or intransigency.
Another issue that is presented with classical macroeconomic theory is that wages are sticky. To explain this it must be understood that there are two calculations of wages. The first is simple, just the actual wage you receive in dollars from an employer. The second is based on the value of the wage compared to the price of goods. Classics believe that unemployment would increase if wages were to be lowered, both real and actual. Keynes disagrees with this statement and believes that a change in wages is more influential to
If I were having a conversation about why the economy is experiencing high unemployment and what the government should do about it, with a Keynesian and a Classical economist I think that the economists would explain the situations in the following way and would support the following policies.
Classical economists promote the idea of two fundamental suggestions. The first is that wages equal the value that would be lost if employment were to diminish by one. The second is that unemployment changes in two categories. The first is defined as frictional unemployment. Frictional unemployment can be mainly explained by reasons based on inconsistent information. First, businesses intermittently try and balance their resources and with miscalculation and changes in demand they will increase or decrease the amount of employees they have. Also, people in-between jobs may not have enough information to find and select the right job. A classical economist would also describe voluntary unemployment. This type of unemployment occurs with the refusal or inability of workers to find jobs, due to legislation, social practices, collective bargaining or intransigency.
Another issue that is presented with classical macroeconomic theory is that wages are sticky. To explain this it must be understood that there are two calculations of wages. The first is simple, just the actual wage you receive in dollars from an employer. The second is based on the value of the wage compared to the price of goods. Classics believe that unemployment would increase if wages were to be lowered, both real and actual. Keynes disagrees with this statement and believes that a change in wages is more influential to