Answer to Question #218120 in Macroeconomics for Devesh Nagar

Question

a).The model of income determination is called a keynesian model. What makes it keynesian,and not classical?Eludicate your argument.

b).What is a business cycle? Explain its phenomenon. How does the unemployement rate behave over the course of a business cycle?

c). Why do we call mechanism such a proportional income taxes automatic stabilizers? How and why it affects fluctuations in output?Explain this mechanism carefully.

Answer 1

Keynesian economics emphasizes that governments should use fiscal policy moreso in a recession while Classical theory focuses on Monetarism, therfore,concentrates on management of money supply primarily via monetary policy.

b)A business cycle is a short run movements (i.e.recessions and expansions) of the activities of the economy. The rate of unemployment increases during recessions and falls in expansions. However, even at the expansion peak, the rate of unemployment never reaches zero.

c)They are called automtic stabilizers because they function to stabilize the cycles of the economy and they are triggered automatically without any additional government action