Question

Q1: Explain why classical economists focus on prices, whilst Keynesians focus on disposable income when it comes to key factors able to maintain expansionary phases. (1)

Q2: What is the connection between Yd, MPC, and the RDGP? (1)

Answer 1

Ans1: Classical economists believed that economy is self-adjusting. Any recession or inflation can be overcome if the market is competitive and functions freely.therefore, they believed that when expansionary phase leads to inflation, prices and wages will self adjust to maintain equilibrium.

Whereas on the other hand, Keynes believed in government intervention. therefore he focuses on disposable income. An increase in taxes by the government can reduce the disposable income and hence can useful during the inflationary phase.

Ans2: part of the disposable income that is consumed is determined by Marginal propensity to consume. And this further derives the Real GDP or employment level in the economy.