Type: Exploratory
Pages: 3 | Words: 780
Reading Time: 4 Minutes

The three major assumptions arisisng from the Keynesian theory includes;

1. Inflexible wages which means that wages will remain rigid. This assumption supports the notion that nominal wages can not be adjustible within the related time period. That brings about situations wherebylabour demand and labour supplies are unequal, and thus involuntary unemployment.

2. Effective demand. The assumption asserts that what the consumer spends depend on real income other than the equilibrium income. That is, consumers make their demands depending on disposable income as opposed to full income as could be indicated.

3. Decrease in demand leads to increse in levels of unemployment. This means that when demand of a commodity decreases, the firms producing that commodity will cut on cost of production by reducing number of employees.

The major assumptions arising from monetarist theory includes;

4. Flexible prices

This serves to ensure market adjustments to equillibrium, while eliminating scarcity or excesses in commondities. When demand of certain commodities go up, workers will demand better wages thus raising prices of those commondities and as a result demand is lowered. This happens in the vice versa as well.

5. Say’s Law

The Law states that supply makes the determination of the demand in the market. According to the Law, when production of commodities are made or services are offered, depending on the supply the prices will vary and thus leading to variations in demand as well.l condition of market economy

6. Saving-Investment equality

Monetarist economist believe that savings and investment are done equally at full emploment. Incase savings rise above investments, then interst rate falls leading to more investment and thus job creation.

According to keynesians where (W*) wage is fixed, an increase in labour force from the current equilibrium labour force to a new one Q, would shift the demand labour curve to the right. Again, this would shift the supply labour curve down, thus producing a new equilibrium employment at e**. Incase of a decrease in demand labour force, the demand curve will shift to the left, thus increasing the number of unemployed people shown by the shaded triangle.

However, this is different from Monetarist argument who belive that Wage, (W*), is flexible and can either increase or decraese freely. Base on this argument, an increase in demand labour force will however not shift the demand curve but will have the supply curve move along the demand curve thus creating a new equyilibrium employment. That is, such an increase would lead to an increase in the equilibrium Wage, W*, to a new equlibrium Wage say W**, at a new equilibrium point b. Incase of a decrease in labour force demanded,the vice versa will happen. That is, the equilibrium wage will fall below the current equilibrium point of W*.

Analysis of the predictions of the models that are making them harder to achieve in practice

The two models are faced by challenges that will make them incapable of operating in a real world situation as opposed to their theoretical nature. This is mainly due to the various assumptions as have been listed above. In the Keynesian model, the three assumptions will not operate in a real economic environment. For instance, assumption that wage will remain fixed is largely impossible. Again, it is highly likely that an increase in labour demand will lead people looking for employment to seek higher wages due to shortage in labour force. The same will happen when labour supply decreases.

On the other hand, a decrease in labour demanded will mean that there is an increase in labour supplied. This will result in to lower wages for labour force due to the high number of people willing to work. Finally, the assumption on the effective demand which states that consumers will spend based on real or nominal income as opposed into equilibrium income. The Keynesians make their argument on a theoretical nominal income, other than the disposable income. There is always that income that will be taken back as tax.

On the other hand, while it is easy to agree that labour supply will influence the demand labour levels, it is important to note that this is not the only factor that would do this. Again production of some goods or some of the services offered may be so important that demand will remain high whether there are variations on the side of supply or not. Another assumption that will not possibly work in real life situation is the saving- investment equality assumption. The assumption, states that both savings and investment will be done equally at full employment. However, this still remains a prerogative of the individual employees whether to save or invest. In fact it is more likely that mst people would consume most of their income, save little and invest nothing.

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