Supply side economics essay

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Supply side economics essay

More Essay Examples on Economics Rubric Keynesian economics advocates a mixed economy — predominantly private sector, but with a role for government intervention during recessions. Keynesian economics served as the standard economic model in the developed nations during the later part of the Great Depression, World War II, and the post-war economic expansion —though it lost some influence following the oil shock and resulting stagflation of the s.

The advent of the global financial crisis in has caused a resurgence in Keynesian thought. This perception rests upon the assumption that if a surplus of goods or services exists, they would naturally drop in price to the point where they would be consumed.

He argued that because there was no guarantee that the goods that individuals produce would be met with demand, unemployment was a natural consequence.

Supply side economics essay

He saw the economy as unable to maintain itself at full employment and believed that Supply side economics essay was necessary for the government to step in and put under-utilised savings to work through government spending. Thus, according to Keynesian theory, some individually rational microeconomic-level actions such as not investing savings in the goods and services produced by the economy, if taken collectively by a large proportion of individuals and firms, can lead to outcomes wherein the economy operates below its potential output and growth rate.

Prior to Keynes, a situation in which aggregate demand for goods and services did not meet supply was referred to by classical economists as a general glut, although there was disagreement among them as to whether a general glut was possible.

Keynes argued that when a glut occurred, it was the over-reaction of producers and the laying off of workers that led to a fall in demand and perpetuated the problem. Keynesians therefore advocate an active stabilization policy to reduce the amplitude of the business cycle, which they rank among the most serious of economic problems.

According to the theory, government spending can be used to increase aggregate demand, thus increasing economic activity, reducing unemployment and deflation. A reduction in interest rates monetary policyand 2. Government investment in infrastructure fiscal policy.

By reducing the interest rate at which the central bank lends money to commercial banks, the government sends a signal to commercial banks that they should do the same for their customers. Investment by government in infrastructure injects income into the economy by creating business opportunity, employment and demand and reversing the effects of the aforementioned imbalance.

Governments source the funding for this expenditure by borrowing funds from the economy through the issue of government bonds, and because government spending exceeds the amount of tax income that the government receives, this creates a fiscal deficit.

A central conclusion of Keynesian economics is that, in some situations, no strong automatic mechanism moves output and employment towards full employment levels. This conclusion conflicts with economic approaches that assume a strong general tendency towards equilibrium.

More broadly, Keynes saw his theory as a general theory, in which utilization of resources could be high or low, whereas previous economics focused on the particular case of full utilization.

The Great Depression

Some interpretations of Keynes have emphasized his stress on the international coordination of Keynesian policies, the need for international economic institutions, and the ways in which economic forces could lead to war or could promote peace. Concept Wages and spending During the Great Depression, the classical theory attributed mass unemployment to high and rigid real wages.

To Keynes, the determination of wages is more complicated. First, he argued that it is not real but nominal wages that are set in negotiations between employers and workers, as opposed to a barter relationship.

Second, nominal wage cuts would be difficult to put into effect because of laws and wage contracts.

Even classical economists admitted that these exist; unlike Keynes, they advocated abolishing minimum wages, unions, and long-term contracts, increasing labour market flexibility.

However, to Keynes, people will resist nominal wage reductions, even without unions, until they see other wages falling and a general fall of prices.

Keynes rejected the idea that cutting wages would cure recessions. He examined the explanations for this idea and found them all faulty. He also considered the most likely consequences of cutting wages in recessions, under various different circumstances.

He concluded that such wage cutting would be more likely to make recessions worse rather than better. Further, if wages and prices were falling, people would start to expect them to fall. This could make the economy spiral downward as those who had money would simply wait as falling prices made it more valuable — rather than spending.

As Irving Fisher argued inin his Debt-Deflation Theory of Great Depressions, deflation falling prices can make a depression deeper as falling prices and wages made pre-existing nominal debts more valuable in real terms.

Excessive saving To Keynes, excessive saving, i. Excessive saving results if investment falls, perhaps due to falling consumer demand, over-investment in earlier years, or pessimistic business expectations, and if saving does not immediately fall in step, the economy would decline.

The first diagram, adapted from the only graph in The General Theory, shows this process. For simplicity, other sources of the demand for or supply of funds are ignored here. Second step bthe resulting excess of saving causes interest-rate cuts, abolishing the excess supply: The interest-rate i fall prevents that of production and employment.

Keynes had a complex argument against this laissez-faire response. The graph below summarizes his argument, assuming again that fixed investment falls step A. First, saving does not fall much as interest rates fall, since the income and substitution effectsof falling rates go in conflicting directions.

Second, since planned fixed investment in plant and equipment is based mostly on long-term expectations of future profitability, that spending does not rise much as interest rates fall.

Supply side economics essay

So S and I are drawn as steep inelastic in the graph. As drawn, this requires a negative interest rate at equilibrium where the new I line would intersect the old S line.Tips on Writing a Good Macroeconomics Essay Paper (for A levels) Second, know the basic macroeconomic demand-side and supply-side policies very well.

Third, explain your Economics clearly. Fifth, make sure there is a good evaluative conclusion to the Economics essay. Last, but certainly not least, be sure to have good time management. Keynesian Theory vs. Supply Side Essay example Words 4 Pages Two very important economic policies that point in different directions of fiscal policy include .

Tax deductions as a tactic of supply side economics: Stimulating the growth of an economy The purpose of this paper is to examine the use of government tax cuts, as one tactic of supply side economics.

Supply-side economics developed during the s of the Keynesian dominance of economic policy, and in particular the failure of demand management to stabilize Western economies in the stagflation of the s, in the wake of the oil crisis in Debate on Keynesian vs.

Supply Side Economics Description: 1. Break the class up into two groups. 2.

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One group should spend time researching Keynesian economic theory, The other group should research Supply Side theory using NPP’s A People’s Guide to the Federal Budget and other sources. 4. Spend one class period debating the topic. Essay on Divisions of The Field of Economics - Micro economists believe it is the forces of supply and demand in any market eliminate any shortages or surpluses in that market.

Supply Side Economics