- Subject index
Macroeconomics Simplified explains the intuition behind Keynesian and neoclassical macroeconomics using graphs and simple algebra.
It provides students with a strong conceptual basis for understanding the tension between Keynesian and neoclassical systems that has once again came to the forefront since the 2007–08 financial crisis.
The book shows how theoretical perspectives affect macroeconomic policy choices and proposes a pragmatic approach to policy that is sensitive to prevailing economic conditions. Students of economics and business alike will enjoy its concise and engaging analysis and find the applications and references to the Indian economy helpful.
Chapter 3: The Neoclassical Macro Model
The Neoclassical Macro Model
The essential difference between neoclassical and Keynesian perspectives is whether market economies, if left to themselves, function efficiently and adjust to full employment or not. Neoclassical economists (including the ‘New Classical’ school) assume that markets, if left alone, work well and that price adjustment ensures that supply equals demand in all markets. They accept that the macroeconomy might deviate from equilibrium output and employment levels, but assume that such disturbances are temporary. They believe that government intervention to smooth out the business cycle is neither necessary nor desirable, as it is likely to exacerbate economic problems rather than rectify them.
Neoclassical models rest on the assumption that under conditions of perfect competition, the operation of market forces will ensure ...