Economics Theory



Keynesian believes that the employment and production level is decided by the aggregate demand level. Then the aggregate demand is the total demand for goods and services in the whole economic system. Keynesian economic theory is based on a circular flow of money, which means that when expenditure increased economic benefits, income also increased, resulting in more spending and revenues. Keynesian ideas generated a lot of economic intervention policy during the Great Depression. At the Great Depression, people's natural reaction is to hoard their money. Under Keynes's theory, this stopped the circular flow of money, keeping the economy at a standstill. The government should spend more, either by increasing the money supply or the actual purchase itself stimulate demand (Celie, 2014). In addition, Keynesian economics advocates a mixed economy.

Monetarist theory:
Monetarism is a kind of economic theory, which says monetary policy is more effective than fiscal policy in regulating the economy. For instance, Bank of England, because it can control the money supply. The change in the money supply has a big influence on national output and the price level in the short run. The objective of monetary policy is the best to meet the goals of the money supply growth rate (Phillp, 2010). Milton Freedman put forward the excessive expansion of the money supply is the essence of inflation. The monetary authorities should focus on maintaining price stability. Monetarists generally believe that inflation depends on how much money the government issues. The idea is that when issue more money, more people will spend money, which increases the demand for goods and services, making the price rise (Robert, 2006). There is a Fisher equation to represent the quantity theory of money, which is the MV=PT, M represents the amount of money in the economy, V represents the velocity of circulation of money, P represents an average price of each transaction made in the economy and T represents the total number of transactions made over a period of Time. But the formula of the four variables is fictional without the value of expenditure equals the value of output.

Classical economics theory:
The classical theory of economics dominated in the early 18th and 19th century, laying the basis for many modern economics (William, 2009). Classical economic theory was first proposed to explore the nature and causes of wealth of nations by Adam Smith. Classical theory was the predominant theory in industrialized nations. This phenomenon has been from the Adam Smith era lasted until the Great Depression era (Martin, 2010). This was the mainstream economic theory many years ago. Before Keynes, its followers developed it as a market-oriented economic system. Classical economic theory is suitable for the self-regulating market. According to this view, to profit for the purpose of attention, to ensure that social resources are used in the most favorable way, not the direction of the government. It means the market could be self-regulating without the government intervention, also means that free markets regulate themselves. This is "invisible hand," which will move markets towards their natural equilibrium, without requiring any outside intervention. According to the classical theory, a market economy will automatically adjust to the natural real GDP. The role of government is to provide a variety of facilities. Such as, national defense, a system of justice, infrastructure and education (Shane, 2008).

Difference:
''The classical economists consider that in a crisis the best monetary policy is no monetary policy. On the other hand, Keynesian thinks that the government intervention in the form of monetary and fiscal policy is absolutely necessary, in order to keep the economy running smoothly. Classical economists believe that in the long run, is designed to provide a long-term solution in the short term losses. Keynes is totally against this, and he thought this is the short term should first target. However, Keynes and the classical theorists believe the fact, the future economy is expected to affect the economy. Although Keynes advocated that the government intervention to correct, classical theorists on people's selfish motivation classification system (Carlos, 2009). Monetarists emphasize control the money supply to control inflation. Monetarists generally criticize the expansionary fiscal policy as it will lead to inflation or exclude, so there is no help.
''Compared with the Monetarist theory and Keynesian theory, during the period of economic recession, Keynes economists often seek to use fiscal government to stimulus of weak economic conditions. In an effort to increase government spending, lower taxes and invest in long-term output and expectations, these policies will improve the economy needs. By contrast, Monetarists are more interested in increasing the money supply available to banks and businesses, it's much easier to obtain credit expectation to more efficient in generating productivity growth. Governments and central Banks often make policy response to the economic recession, which are based in part on the two theories of money (Matt, 2007) .
Discussion:
The financial crisis originated in the USA, the financial crisis: Credit expansion, the virtual economy caused by the rupture of the bubble economy is the main cause of the financial crisis. At the beginning of 2006, when USA housing sales began to appear signs of decline, USA economy and the world economy are still a thriving prosperity. In the three quarters of 2006, the national real estate sales in severe decline. In 2007 February, the largest subprime mortgage companies to reduce lending, and release the profit warning. In early 2008, America's two biggest mortgage bonds started to be dumped, heralding the whole real estate industry began to complete collapse. The crisis was not only happened in the subprime mortgage market and financial market, and has spread from the housing to manufacture, to services of all industries (Johnson, 2010).
In Keynes's view, the cause of the crisis first lies in the insufficiency of effective demand. The insufficiency of effective demand is due to the marginal propensity to consume, the marginal efficiency of capital and liquidity preference of these three basic psychological factors, so the market mechanism cannot make the total demand and supply balance in full employment level, there is a recession and unemployment. According to the theory of monetarism analysis, the main reason for the outbreak of the financial crisis is the government's improper monetary policy, as well as the highly developed financial market liquidity caused by the rapid expansion. Friedman argues that the government should try to avoid changing currency itself becomes the source of economic fluctuations. At the same time, new monetarism believes that in today's world liquidity in the financial markets in the past no longer the central bank can control the liquidity if the monetary base and broad money is given priority to, on the market at the most is the central bank cannot directly control by endogenous liquidity, such as all kinds of financial derivatives market. Highly developed financial system not only created a large number of high yield of financial assets, let the rest of the emerging economies monetary funds to successful completion of the economic cycle of flowing into the U.S. economy. Meanwhile it based on the created a surprising number of market liquidity, the liquidity is not only to a certain extent caused investors to market the illusion of prosperity, let investors' appetite for risk is higher and higher, also the financial asset prices are too high. It has given rise to the formation of bubbles'Xia, 2009'. Therefore, these recessions were expressed by the disadvantage of the market self-regulation for many parts. Overall, the most appropriate reason for this time crisis could be explained by the classical economic theory.
The evaluation of UK government's policy:

In 2008 American financial crisis exerted an important influence on a majority of countries in the world. Especially in Britain. Especially in Britain. Britain had many businesses fail because of lack of funds in that year, and leading to a large number of people cannot find work and unemployment. Further, no labor to create wealth, so the economy languished. Finally the bank value has shrunk, heavily in debt, then the market is also greatly reduced.
In view of the crisis, the British government has taken some measures, respectively from the fiscal policy and monetary policy. The British tend to cut spending rather than inflation to repay the debt and at the same time to increase the strength of the recovery. The Bank of England in 2009 frequent uses of liquidity injection tools to develop a large fiscal stimulus plan, the plan to increase the amount of cash in the economy, involves buying government and corporate bonds to stimulate spending, support bank lending. In addition, the central bank input ??500 million for achieving financial regulatory reform in order to re-establish the authority of the central government encourages universities by attracting overseas students and other measures to avoid financial difficulties.
The British government completed after these measures, which bring about a series of effects. The British economy slows rebound, the rebound in the stock market. The increase in consumer confidence also brings the increase in purchase commodity demand. But the increasing currency will cause future economic expansion. What's more, British export expansion, import recessions, the results are a trade deficit (Zhang, 2010).
Conclusion:
The globalization economic is becoming more and more general around the world, then the economic health of global financial growth should be taken responses by mainstream financial power, such as the UK and the United States. In this paper, the big financial crisis is easily explained by the knowledge we learnt in class. When facing the global financial crisis, only according to the shortcomings of the three theories to improve and seriously summarize the causes of the financial crisis. The global economy will be further perfected.

Source: Essay UK - http://turkiyegoz.com/free-essays/economics/economics-theory.php


Not what you're looking for?

Search:


About this resource

This Economics essay was submitted to us by a student in order to help you with your studies.


Rating:

Rating  
No ratings yet!

  • Order a custom essay
  • Download this page
  • Print this page
  • Search again

Word count:

This page has approximately words.


Share:


Cite:

If you use part of this page in your own work, you need to provide a citation, as follows:

Essay UK, Economics Theory. Available from: <http://turkiyegoz.com/free-essays/economics/economics-theory.php> [14-12-18].


More information:

If you are the original author of this content and no longer wish to have it published on our website then please click on the link below to request removal:


Essay and dissertation help

badges

 
The Internets Own Boy The Story of Aaron Swartz | Gestisci iscrizione Prime Cancella o visualizza vantaggi | 23,831,186 03:39 Katakan Sejujurnya Armada