Chapter 26: Problem 11

Do neoclassical economists tend to focus more on cyclical unemployment or on inflation? Explain briefly.

Short Answer

Expert verified

Neoclassical economists tend to focus more on inflation rather than cyclical unemployment. This is because they believe in the self-correcting nature of the market and that cyclical unemployment is a temporary issue that will resolve itself as the economy adjusts. In contrast, they consider inflation to have significant long-term consequences for the economy, such as market inefficiencies, reduced economic growth, and income redistribution, which opposes their core assumption of efficient resource allocation.

Step by step solution

Understanding Neoclassical Economics

Neoclassical economics is a branch of economics that focuses on the rational behaviour of consumers and firms, utilization of scarce resources, and the role of market forces in determining economic outcomes. Neoclassical economists believe that market outcomes are efficient in terms of allocating resources and that government intervention should be minimal.

Understanding Cyclical Unemployment

Cyclical unemployment is a type of unemployment that is related to the fluctuations in the business cycle. It occurs when there is a decline in economic activity and firms reduce their workforce, leading to job loss. This type of unemployment is temporary and tends to decrease as the economy recovers and expands.

Understanding Inflation

Inflation is the rate at which the general level of prices for goods and services is rising over time. When inflation is high, the purchasing power of money decreases. Inflation affects various aspects of the economy, such as investments, savings, consumption, and production.

Comparing Neoclassical Economists' Focus on Cyclical Unemployment and Inflation

Neoclassical economists tend to focus more on inflation rather than cyclical unemployment. This is because neoclassical economists believe in the self-correcting nature of the market, which implies that the economy will naturally reach a long-run equilibrium with full employment. In this view, cyclical unemployment is a short-term problem that will resolve itself as the economy adjusts. On the other hand, inflation has more substantial long-term consequences for the economy. High inflation can lead to market inefficiencies, reduced economic growth, and income redistribution, which opposes the core neoclassical assumption of efficient allocation of resources.

Conclusion

To conclude, neoclassical economists tend to focus more on inflation because of its significant long-term consequences for the economy and resource allocation. Cyclical unemployment is viewed by neoclassical economists as a temporary issue that will resolve itself as the market adjusts and returns to a long-run equilibrium with full employment.