Economics-For Managers

In this chapter we examined the different schools of thought in macro economics and the assumptions on which the economic theories are based. According to the classical approach, prices and wages are flexible and the economy is stable. The economy moves automatically and quickly to full employment equilibrium without any government intervention.

The Keynesian approach on the other hand is based on the assumption that prices and wages are inflexible and government needs to intervene to maintain stability of business cycle. Monetarists believe that it is only money supply that affects aggregate demand, output and prices whereas Keynesians argue that money helps in output determination along with spending variables like fiscal policy and net exports.

Keynesian economists, feel that output will significantly change if there is a change in nominal demand but the change in output will have very small effect on prices in the short run.