Implications for the role of economic theory, Microeconomics

Implications for the Role of Economic Theory:

Like the schedule for the marginal efficiency of capital, expectations about the future market rate of interest underlie the liquidity preference schedule. In Keynes' analysis, there are three factors which influence the level of output and employment in the economy in the short-run significantly. These are i) the quantity of money in circulation, ii) the money wage rate, and iii) certain fundamental psychological factors, the psychological attitude to liquidity and the psychological expectation of future yield from capital assets.

In analysing the determination of aggregate output, Keynes therefore takes the above factors including 'the psychology of the public' as given. For example, he takes marginal efficiency of capital and liquidity preference schedules as given. Changes in these factors are then studied separately in terms of their effect on output and employment.

Psychological factors do not necessarily denote random factors. These might depend (though not necessarily reasonably) on specific social and political circumstances. Two major implications follow from the fact that psychological factors are important in the determination of output. First, the level of output and employment and other relevant variables in the economy will not, in general, be predictable (in the form of an objective probability distribution) on the basis of historical data on a limited number of measurable factors alone. Second, changes in independent variables brought about as a measure of policy may also lead to changes in other determining factors, but not necessarily in a predictable manner. For example, Keynes recognises that monetary policy can have different effects on output depending on its impact on expectations about future monetary policy and therefore on the liquidity preference schedule. Similarly, there is recognition (Keynes, 1936, p.120) that a government programme of public works may "through its effect on 'confidence', increase liquidity-preference or diminish the marginal efficiency of capital, which, again, may retard other investment unless measures are taken to offset it." 

 

Posted Date: 11/20/2012 6:23:53 AM | Location : United States







Related Discussions:- Implications for the role of economic theory, Assignment Help, Ask Question on Implications for the role of economic theory, Get Answer, Expert's Help, Implications for the role of economic theory Discussions

Write discussion on Implications for the role of economic theory
Your posts are moderated
Related Questions
Is Indian companies running a risk by not giving attention to cost cutting?

Differentiate the definition of economics as given by Prof. Marshall and Prof.Robbins. Illustrate the concept of production possibility curve .How PPC is helpful to solve econom

1.  How does the marginal social benefit curve of a common resource compare to the marginal social benefit curve of positive externality from a mixed good? Highlight the difference

The Bandwagon Effect - This is desire to be in style, to have a commodity because almost everyone else has it, or to indulge in it. - This is major objective of marketing an

Public Administration: According to L.D. White, "Public administration consists of all those operations having for their purpose the fulfillment or enforcement of public polic


b) Why is monopoly considered to be generally against public interests, and what policy instruments can be used to regulate monopolies?

What is the theory of Second Best? Prove the theorem with the help of a diagram.

How might a “perfect” macro equilibrium be affected by (a) a stock market crash; (b) the death of a president; (c) a recession in Canada; (d) a spike in oil prices?

Problem 1: i) Is Protectionism always beneficial? Discuss. ii) To what extent can a country actually rely on the principle of Comparative advantage before engaging in in