Economy Essay, Research Paper

The economy was once new and beliefs varied a little from the beliefs of the twentieth century. These beliefs were created in the 1500’s and were considered Classical Economist beliefs. These beliefs went on for three hundred and fifty years and were followed as a standard for that time period. Once the knowledge of John Manard Keynes was into looking, the great depression ended. For nearly ten years this country experienced a high rate of unemployment. This happened during the downfall of the American economy in the late 1920’s. John Manard Keynes noticed the economy should be changed in order for the depression to be ended. He created the Keynesian Economist beliefs. These beliefs are in stability and have kept the economy on a steady pulsation upwards. The beliefs between Classical and Kenesian models are somewhat reciprocals to each other. Classical Economist included John Baptiste Say, Adam Smith and David Ricardo. John Baptiste Say wrote “supply creates it’s own demand” and was considered Say’s Law in the 1600’s. Adam Smith wrote “The Wealth of Nations” and this publication dealt with America’s Income and Savings. Finally, David Ricardo created the “Theory of Comparative Advantages. These Economists were great influential theorist and aided the Classical Economist’s beliefs. Philosophies differ from Classical to Keynesian, but the overall drive to keep the economy stable is what both beliefs are intended to pursue.

Classical Economist, which included: John Baptiste Says, Adam Smith and David Ricardo, wrote individual pieces relating to the economy. John Baptiste Say created the “Say’s law” and wrote “supply creates its own demand.” Therefore, The economy would be stable, the

first belief in the Classical Economy. This Classical Economist belief was developed in the 1800 s and followed until the Great Depression of the 1920’s. Adam Smith wrote the “Wealth of Nations” and it was related to income and savings dependent to the nation. Free trade was involved creating competition to supply with higher quality goods and more specialization. David Ricardo created the “Theory of Comparative Advantages” and it stated that producers would produce the least in opportunity cost.

Classical Economist beliefs included six ideas. First the economy is stable. Secondly, forces of supply and the forces of demand would be self-correcting. Third, rationing principle, “Price.” Prices and wages are both flexible upwardly and downwardly. Government intervention is not necessary and finally, over the long run business cycles are not possible. These were the beliefs set onto the economy in the 1500’s and lasted until 1850. Economist of the 19th century believe that when the level of Aggregate demand was not able to buy the output of final products that would provide full employment, the surpluses in input markets would cause input price to decrease. These declines would then increase aggregate supply to increase equilibrium real GDP. It would set up market forces that would eventually increase real GDP and eliminate cyclical unemployment. One of the important assumptions of Classical Economist is the fact that a decrease in aggregate demand causes a cycle in unemployment, wages and other input prices. They fall sufficiently to move aggregate supply outward enough to restore full employment. A decrease in aggregate demand moves the economy to a lower real GDP macroeconomic equilibrium. A decrease will shift curve downward while a demand shifts inward creating a lower equilibrium caused by lower nominal wages due to surplus in labor.

Keynesian Economist beliefs include: the economy is not stable, there are not any self correcting forces of supply and demand, a stress on outputs such as the GDP deflator, wages are sticky, outside intervention is considered necessary and finally, it is looking in a short run perspective. Kenesian model implies that the nominal wages are rigid, therefore making it impossible for the self-correcting assumptions of the classical beliefs to occur. Corrective measures are needed to take place in order to revive aggregate demand to levels that allows full employment. The model also avoids declination in aggregate real income and employment opportunities.

The economy was unstable due to a great depression that occurred in the 1930 s. This was a time were the economy was unstable with a 25% unemployment rate. This was in definite a need to change. Kenesian models set forth to create a stable economy that would never reach another depression. His theories took America to higher levels after the 1940 s.

Government policies, such as the monetary and fiscal policies are necessary. Monetary policy is the action taken by national banks to influence the money supply or interest rates in attempts to stabilize the economy. Fiscal policy is the use of government spending and taxing for the specific purpose of stabilizing the economy. Both of these policies are necessary and are effective in stabilization.

Sticky wages support the economist belief because the flexibility of reducing wages is not allowed. Upward flexibility can only occur. Also the economy is looked at in a short run perspective in order to prevent a deep recession. Short run perspective is important to the

Keynesian model because it can correct the recession quicker than if your economy is

Functioning in the long run perspective. John Manard Keynes reversed most of the Classical models beliefs in order for the United States of America to exit the great depression. These beliefs are relatively in act and are far better for the economy than the classical economists beliefs.

Classical Economist model was sufficient until a depression occurred therefore a change was in need. John Manard Keynes created the Keynesian Economist model, which set the economy back out of depression and into and upward path. Keynes was a renovator of the economy and those assumptions stated in the above paragraph show how Keynes disagreed with the classical economist model.