Classical and Keynesian view of the economy Federal Reserve

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STEP 1
1. Delineate the differences between Classical and Keynesian views of the economy. Describe the circumstances that led to the development and dissemination of the Keynesian economic theories. Evaluate each system from a modern perspective with special attention to the strengths and weaknesses inherent in each system to influence macroeconomic factors in the current economic environment. Bring the expansion of societal responsibilities and the globalization of markets into the discussion.
The difference between Classical and Keynesian views are that the classical view is a demand side economics and Keynesian view is the supply side economic view. This has been taken from ttp://www.bized.ac.uk "Classical economists have a fundamental belief in free markets - a 'laissez-faire' economy. They believe that left to itself, the economy will find its own full-employment equilibrium. In other words, there is no point in the government trying to manipulate the economy to get full-employment; it will make its own way there in the long run. The key to this is in the way they assume the labor market works.

Keynesian economists, subscribe to the views of John Maynard Keynes, a famous economist of the twentieth century. They have a different view of the workings of the labor market, and would argue that it doesn't work perfectly. They believe that wages are 'sticky downwards'. This means that any unemployment may not lead to wages falling. This in turn means that the unemployed do not get re-employed. Getting rid of unemployment therefore means the government intervening to boost demand enough to get those people employed again." ttp://www.bized.ac.uk

The one great advantage of the classical economic view was that it gave us the theory of comparative advantage. This theory is valid even today and is being used in the context of globalization. The resources that give advantage to a country are natural minerals, location and weather but also low cost labor. This has led to the outsourcing of business processes in the big way and has powered globalization.

However, the over exploitation of the comparative advantages by foreign countries rather than own countries has led to societal exploitation. For, example, multinational exploits the environment and damage it irreparably in the developing countries. Low cost labor is being exploited in a cruel way in third world countries by global companies like Wal-Mart and Nike.

2. Describe the functions of money in our society. How does the money supply influence the macroeconomic goals of price stability, full employment, and economic growth? Describe the major tools the Federal Reserve System uses to influence the money supply.

The four functions of money still remain valid even today. Money is a medium of exchange, unit of account, standard of deferred payment and store of value. The difference is that of degree. For example, money that is currency notes are still a store of value, but most people store their value in checking accounts.
Money supply plays a pivotal role in achieving the macroeconomic goals of the country: This material is taken from ttp://en.wikibooks.org "This does exactly what it says on the tin! A government can increase the money supply by printing money or providing incentives for banks to ...