- 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 4: The Simple Keynesian Model
The Simple Keynesian Model
In contrast to neoclassical thinkers, Keynesians assume that markets function imperfectly, and that individual maximising behaviour in the presence of uncertainty can lead to socially irrational outcomes. As Mankiw puts it, ‘the Keynesian school believes that understanding economic fluctuations requires not just studying the intricacies of general equilibrium, but also appreciating the possibility of market failure on a grand scale.’1
Keynesians believe that there are no inherent or inevitable reasons why savings should equal investment, or why market forces should result in full employment. In the Keynesian world view, prices do not adjust quickly and economic adjustment takes place primarily through changes in output and employment. For most Keynesians, the role of an economist is to develop policies which ...