Ecomonics Coursework

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Economic Theory, Policy and Applications (ETPA) Assignment

Question 2 Schools of thought and labour markets

Three assumptions associated with Keynesians in relation to labour markets:

Rigid Prices/Wages: Keynesians assume that prices are inflexible/rigid, more so in the downward direction. This price rigidity is fundamental to the Keynesian implication of sustained unemployment. If prices, especially wages, do not decrease/decline then the resulting labour market surplus means unemployment.

Another assumption is the concept of effective demand. This stipulates and assumes that the aggregate expenditures on real production are based on existing or actual income rather than the income that would be generated with full employment of resources. This more simply explained means that people spend the income that they actually have not the income that they could have under other circumstances. Also "If the household sector has more income because the economy is expanding, then they increase consumption expenditures.

If the household sector has less income because the economy is contracting and a large group of workers is unemployed, then they decrease consumption expenditures" (Amosweb, 2000-2013)

The final assumption is that savings and investment are influenced by other factors than the interest rate, such as disposable income. Keynesian economics assumes that the relation between saving and income is a great deal more significant than that between saving and the interest rate.

Three assumptions associated with the Monetarist economist:

Monetarist economists assume that all markets will clear at some point and that "A fall in aggregate demand will lead to a fall in wages and prices and a restoration of the full-employment equilibrium". This assumption of Price flexibility means that markets are able to adjust quickly and efficiently to the equilibrium point.

Another assumption is Say's law. The assumption is that the aggregate production of good and services in the...