Macro Economics Essay Example | Topics and Well Written Essays - 500 words - 1

Macro Economics - Essay Example The focus shifts from expenditure to save more of the current income for future spending. Thus in reacting to this less expenditure on the part of the consumers and the investors the firm will lower their production resulting in less output. Reduction in the wage rate of the workers in this circumstance will not contribute to the elimination of the huge unemployment rate prevailing in the economy. Simultaneous decrease in the interest rates in the economy will also not succeed in returning the economy back in the original track (Gwartney, Stroup, Sobel and MacPherson, 228). Wages and interest rates are considered fixed in the Keynesian theory. According to the theory even if there is a decline in the wage rate a negative impact will be exerted on the economy through the reduction in income and hence reduction in aggregate demand. Keynesian theory rejects the view of the classical economists that market forces will bring back the system of full employment in the economy. Equilibrium i n the economy will be reached when the total spending in the economy will be equal to the total output. Changes in output may drive the economy to a certain extent towards the equilibrium as opposed to price changes as suggested by the other stream of economists.