Theories and Application of Economics

In the twentieth century many classical or non-classical Economist claimed that the Economy will always be at or close to natural level of Employment (Keynes, 1936). In Appropriate it is the great features of the economic system in which we live, while variation in output and employment will make the economic system violent. The recession in United States was resolved by practicing the Keynes policy. Keynes Expansionary policies were also implemented by Sweden and Germany but the true success of Keynes can be seen after the World War II which provided a boom to Economy (Keynes, 1937) Evidence indicates that natural employment will be for limited period.

In order to start the discussion I will provide with the definitions of both Aggregate Demand and Aggregate supply. According to (Blanchard,Amighini,Giavazzi, 2010), Aggregate Demand represents the Combination of price and output corresponds with the equilibrium in the goods and financial market. Further in order to understand above statement we can elaborate Aggregate Demand. Aggregate Demand shows the relationship between Equilibrium markets for goods with equilibrium market for money. If there is no shadow economy then total Expenditure(Y) can be equal to total GDP or total income earned, so consumption, investment and government expenditure can be found in the GDP or total expenditure model. Many Entrepreneurs believe that changes in consumer consumption will affect price and then later investment. However economists consider that investment will be dependent on interest rate. Change in price will also affect aggregate demand (AD). Hence AD is the reflection of all of Equilibrium points between IS/LM model this can be seen in the graph below Figure1

(Figure1 Source Blanchard)

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... by using mix policy

Bibliography

Keynes,J.M. (1937)The General Theory of Employment

Source: The Quarterly Journal of Economics, Vol. 51, No. 2 (Feb., 1937), pp. 209-223

Keynes, J.M. (1936) The General Theory of Employment, Interest, and Money, London: Macmillan.

Minowitz, P. (2004) 'Adam Smith's Invisible Hands', Econ Journal Watch, vol. 1, no. 3, December, pp. 381-412.

Schiller, B.R. (2001) Essentials of Economics, 4th edition, American University.

Thirlwall, A.P. (2007) 'The Relevance of Keynes Today: with Particular Reference to Unemployment in Rich and Poor Countries', Cambridge Centre for Economic and Public Policy, Cambridge, 1-40.

Blanchard, O.Amighini, A., Giavizzi,F.(2010),Macroeconomics A European Perspective. First published 2010.Pearson Education Limited 2010,pp.162-184.