Question

1. Briefly explain the historical events that led to the fall of the Classical model. Explain the economic implications of these events in terms of why they caused the model to fall into disfavor.

2. Keynes dramatically rethought how the demand for money was structured. What was the key difference between his formulation and that of the Classical model?

3. How did the modern Monetarist reformulation of the Quantity Theory? Combine the Cambridge version of the Quantity Theory of money and the Keynesian Money Demand function?

Answer 1

ans 1=

After 1929 a distrust was cast over the classical model of economics according to which state shouldn’t intervene in the economy. The 1929 downturn brought deflation, financial institutions going bankrupt and immense unemployment with firms shutting down in masses.

In 1936 Keynes published the ‘General Theory’, in this work he advocated a particular amount of governmental intervention to stimulate consumption. Transferring funds from the wealthy to the destitute was one of the chief means to obtain that goal.

After WW2 the Keynesian solutions were applied in the economy because the 1929 downturn had questioned classical liberalism. It was hereafter believed that the market economy would bring about instability & that state could stabilize the economy.