Keynesian Model Assignment Answers
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Keynesian Model: Taking a look at the classical model
In 1776, Adam Smith, known as the father of Economics, tossed a theory of ‘Invisible Hand’ in his book Wealth of Nations. He said that in free market, self-interested individuals operate through mutual interdependence that subsequently promote and produce benefits to society at large. He added that these benefits are better than those from regulated economy. Hence, arguing, that Economy should be left free, of no interference from any third-party, so that the ‘invisible hand’ guides demand and supply to find equilibrium.
While this theory was widely accepted, in 1930 – the post Great Depression era – there was a big hit to its reliability. British economist John Maynard Keynes, during his research on depression, challenged the classical theory with his own model. He said that optimal economic performance can be achieved by influencing the aggregated demand through economic stabilization policies from the government.
Weighing both the sides of this theory
On The Great Depression, he argued that the government can pull put out the economy from its misery by increasing expenditure and lowering tax rate, which would increase the demand in the market. This was against the conservative premise that said employment and economic output is self-adjusted (by invisible hand) and should not be influenced by any external policies.
Which of these models are correct and reliable is argued even today.
Finding its essence
However, in short, Keynesian model of economics is a demand-side theory, with a short-term view, that encourages government to make necessary intervention so that the economy stabilizes and find its optimum performance point quickly.
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