SAMARA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS
PRACTICAL ATTACHMENT REPORT SUBMETTID TO DEPARTMENT OF ECONOMICS
Title: OFFICE OF FINANCE AND ECONOMICS DEVELOPMET.

BY:ATIBIYANESHBIRHAN
IDNO:1202164

Submitted Date 04/7/2015

MARCH 2023

SAMARA Ethiopia
1.Analyze the fundamental mistakes committed by classic
economists in their theoires according to keynes?

Keynesian economists do not agree with classical economists?

While Classical economists believe there should be limited or no government

intervention in the market, Keynesian Economics posit that government
spending can help jump-start an economy out of recession by increasing
demand.

The classical prediction that full- employment equilibrium will be achieved

in the long-run was not acceptable to Keynes, who wanted to solve the short
run problem of unemployment. According to Keynes, in the long-run there is
no problem; in the long-run, we are all dead.

Keynes also attacked the classical theory in regard to saving and

investment. He objected to the classical idea of saving and investment
equilibrium through flexible rates of interest. To him saving and
investment equilibrium are obtained through changes in income rather than
in the interest rate.

the main points of Keynes’ criticisms against the classical theory: such as

1. Unrealistic Assumption of Full Employment Condition:

2. Undue Importance to the Long Period:

3. Keynes’ Denial of Say’s Law of Markets:

4. Attack on Money Wage Cut Policy:

5. Keynes’ attack on Interest Rate to be strategic variable:

6. Keynes’ Attack on Laissez-faire Policy:

1. Unrealistic Assumption of Full Employment Condition:

Keynes considered the fundamental classical assumption of full employment

equilibrium condition as unrealistic. To him, there is the possibility of
equilibrium condition of underemployment as a normal phenomenon. Keynes
1
regarded it as a rare phenomenon.Keynes in fact considered the
underemployment condition of equilibrium to be more realistic.

2. Undue Importance to the Long Period:

Keynes opposed the classical insistence on long-term

equilibrium; instead, he attached greater importance to short-
term equilibrium. To him, “in the long run, we are all dead.”
So, it is no use to say that in the long run everything will be
all right.

3. Keynes’ Denial of Say’s Law of Markets:

Classical economists rest on Say’s Law which blindly assumed that supply
always creates its own demand and affirmed the impossibility of general
overproduction and disequilibrium in the economy. Keynes totally disagreed
with this view and stressed the possibility of supply exceeding demand, causing
disequilibrium in the economy and pointed out that there is no automatic self-
adjustment in the economy.

Thus, Keynes pointed out the error of the classicists in denying general
overproduction and unemployment. He also pointed out that the economic
system in reality is never self-balancing in character. He, therefore, maintained
that State intervention is necessary for adjustment between supply and demand
in the economy.

4. Attack on Money Wage Cut Policy:

Keynes pointed out that trade unions are an integral part of the modern
industrial system and they could certainly resist a wage-cut policy. Strikes and
labour unrest are the bad consequences of such a policy.

Similarly, there is welfare legislation regarding minimum wage and

unemployment insurance in a Welfare State. Dillard remarks: “Therefore, it is
bad politics even if it should be considered good economics to object to labour
unions and to liberal labour legislation.” Thus, in modern times, money wage
cut is not a practical proposition.

5. Keynes’ attack on Interest Rate to be strategic

variable:
Keynes also attacked the classical theory in regard to saving and investment. He
objected to the classical idea of saving and investment equilibrium through
flexible rates of interest.
2
6. Keynes’ Attack on Laissez-faire Policy:

Keynes strongly attacked the classicists for their unrealistic approach to the problems of
contemporary capitalist economic system. Pigou’s plea for a return to free perfect
competition to solve the problem of unemployment seemed ‘obsolete’ in the changed
conditions of the modern world.

classical theory, in Keynes’ view, is unrealistic and irrelevant to the

present conditions and out of date, and, thus, cannot be a guide to the
solution of modern economic problems. Thus; the basic need is for a theory
which will diagnose the ills of the modern economic system and furnish a
guide for the solution of problems like unemployment, business cycles,
inflation and other economic ills.

2 .Give abrief outlineof keynesia theory of employment

As per Keynes theory of employment, effective demand signifies the money spent on the
consumption of goods and services and on investment.

The total expenditure is equal to the national income, which is equivalent to the national
output.

Therefore, effective demand is equal to total expenditure as well as national income and
national output.

The theory of Keynes was against the belief of classical economists that the market forces in
capitalist economy adjust themselves to attain equilibrium. He has criticized classical theory
of employment in his book. Vie General Theory of Employment, Interest and Money. Keynes
not only criticized classical economists, but also advocated his own theory of employment.

ADVERTISEMENTS:

His theory was followed by several modern economists. Keynes book was published post-
Great Depression period. The Great Depression had proved that market forces cannot attain

3
equilibrium themselves; they need an external support for achieving it. This became a major
reason for accepting the Keynes view of employment.

The Keynes theory of employment was based on the view of the short run. In the short run,
he assumed that the factors of production, such as capital goods, supply of labor, technology,
and efficiency of labor, remain unchanged while determining the level of employment.
Therefore, according to Keynes, level of employment is dependent on national income and
output.The Keynesian theory of employment states that the cause of
unemployment is the deficiency of effective demand, and unemployment can be
removed by raising effective demand. With the increase in effective demand,
the production in the economy goes up.Keynes's General Theory shows that a
situation of full employment is not the natural outcome of market forces in
economies that are subject to change. Rather, there is a wide range of
possible equilibrium situations, with differing degrees of unemployment
Keynesian theory of employment is based on the following assumptions:

i He carries out his analysis in the closed economy, ignoring the effect of foreign trade.

(ii) His analysis is a macro-economic analysis, i.e., it deals with aggregates.

(iii) He assumes the operation of the law of diminishing returns or increasing costs.

3. Explain the liqudityprefernce theory of keynes

The liquidity preference theory of Keynes states the relationship between interest rate,
liquidity preferences, and the quantity or supply of money. It explains the preference for
money or liquidity and the reason to demand and get a high-interest rate for long-term
financial assets.

The founder of Keynesian economics and the father of modern macroeconomics, John
Maynard Keynes popularized this concept in his book- The General Theory of Employment,
Interest, and Money (1936), explaining the liquidity preference framework analyzing the
determination of equilibrium interest rate based on the supply of and demand for money.

 The liquidity preference theory of interest was introduced by the father of modern
macroeconomics, John Maynard Keynes, in his book The General Theory of Employment,
Interest, and Money (1936).
 The theory focuses on the interest rate, liquidity preferences, and the quantity or supply of
money. It explains the association of higher interest rates with long-term instruments.
 The theory explains people’s motives to prefer holding cash rather than investing in interest-
bearing securities. The three motives explained by the model are transaction, precautionary
and speculative motives.

Keynes portrayed the liquidity preference model in terms of three motives:

Transactions Motive

4
It highlights the people’s choice to prefer liquidity for their day-to-day expenses or normal
transactions.The amount of liquidity is directly proportional to the income
level.

Precautionary Motive

Cash plays an important role in everyone’s life, specifically in times of crisis and
emergencies. Precautionary demand reflects the need to cover abrupt expenditures,
contingencies, or unforeseen opportunities.

Speculative Motive

Speculative motive explains people’s intention to gain speculative profit utilizing changes in
interest rates. If the interest rate is low or investors may have a higher demand for liquidity,
anticipating a future increase in interest rates, they hold cash for future investment.

4.What is the basic reason for emergence of post keynesian eonomics

Keynes believed that the Great Depression seemed to counter this theory. Output
was low, and unemployment remained high during this time. The Great
Depression inspired Keynes to think differently about the nature of the
economy.Keynesian economics is based on two main ideas. First, aggregate
demand is more likely than aggregate supply to be the primary cause of a short-run economic event
like a recession. Second, wages and prices can be sticky, and so, in an economic
downturn, unemployment can result.

For Keynesian economists, the Great Depression provided impressive

confirmation of Keynes's ideas. A sharp reduction in aggregate demand had
gotten the trouble started. The recessionary gap created by the change in
aggregate demand had persisted for more than a decade

Keynesian economists believe that recessionary and inflationary gaps can

persist for long periods, they urge the use of fiscal and monetary policy
to shift the aggregate demand curve and to close these gapKeynesian
economic theory is a macroeconomic theory that advocates for increased
government spending and lower taxes to stimulate demand.s.

· Unemployment is subject to the whims of demand and therefore undesirable.

· Active stabilization policy is required to reduce the volatility of the business cycle.

· Inflation is less important than unemployment.

5
.