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Macroeconomics: Theory & Policy - Essay Example

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The current financial and economics crisis all over the world has again started debate among the economists about which economic theory is more useful in explaining market mechanisms. Some economists advocate the Keynesian economic theory whereas the others argue that Classical…
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Macroeconomics: Theory & Policy
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Macroeconomics: Theory & Policy

vent and the business world has suffered lot of setbacks because of the unexpected arrival of the current financial crisis since they failed to take any precautionary measures. This paper briefly explains both Keynesian economic theory and Classical economic theory and compares the merits of both in the basis of the current market failure and economic crisis.
Keynesian economics and classical economics are the two major streams of economics. Classical economic theory was the first economic school of thought founded by the great economist Adam Smith in the 18 the century. The Classical economics theory assumes that free markets can regulate themselves if left alone, free of any human intervention (Patil, 2010). This theory has immense belief in the market’s ability to stabilise after fluctuations. Classical economists believe that it is difficult for the market to function without fluctuations because of the dependence of the market with so many other internal and external parameters. Any changes that happened in these parameters can affect the market mechanisms or the performances. Classical economists believe that the government need not intervene in the market to save it in case of big fluctuations as the market itself has the stabilising capacity.
On the other hand, Keynesian economics the brain child of the great economist, John Maynard Keynes, believe that there is no divine entity, nor some invisible hand, that can tide us over economic difficulties, and we must all do so ourselves. It stresses on the fact that Government intervention is absolutely necessary to ensure growth and economic stability (Patil, 2010). Thus we can see that both classical economists and the Keynesian Economists have different views about the market mechanisms and the market functioning. The current economic crisis came at an unexpected time and neither the classical economists nor the Keynesian economists succeeded in predicting the current crisis. A deep understanding of the ... Read More
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