Economics Essay Example | Topics and Well Written Essays - 1000 words - 17

Economics - Essay Example In a closed economy where there is no foreign trade, the level of outputs that are produced will be at market equilibrium as the demand levels will further be met by the supply levels. However, during recessions, when unemployment rate rises, the demand will still be met by the supply, although the demand level will be lower. This is why in the goods market prices and quantity will settle at the equilibrium but high unemployment can still be present in the economy. This has been termed as the â€Å"Keynesian unemployment†. As what has been described earlier, in determining output to meet the demands, there are two views—the Keynesian and the classical view. The classical view argues that prices and wages are flexible, in such a way that excesses in either demand or supply will quickly be absorbed by the economy and resume full employment of resources after economic shocks—or abrupt changes in the aggregate demand and supply curves. The Keynesian view on the other hand argues, as apparent in its sticky theory of prices and wages which says that these two factors are sticky in the short run because of contractual rigidities such as agreements made with different interest groups such as the labor unions. In the latter situation, the one proposed by Keynes, higher levels of aggregate demands are needed for output to respond positively because aggregate supply curve is relatively flat especially when output levels are low. In this situation, the economy can have long periods of unemployment b ecause prices and wages are slow to adjust to shocks, and reaching full employment of resources is slow to reach. When classical economists argue that unemployment results from the interaction of the labor demand and supply curves, and lowering the wages will spread the labor supply which can curb unemployment in the process,