Chapter 12: 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 that market forces will eventually correct temporary imbalances like cyclical unemployment in the long run. In contrast, they see inflation as a crucial issue that requires proper management to ensure efficient resource allocation and economic stability.

Step by step solution

Understanding Cyclical Unemployment and Inflation

Cyclical unemployment refers to the unemployment arising due to fluctuations in the business cycle. It occurs when demand for goods and services declines during a recession, and businesses lay off workers as a result. On the other hand, inflation is the rise in the general level of prices over time, leading to a decrease in the purchasing power of money.

Introducing the Neoclassical Approach

Neoclassical economics is a school of thought that focuses on the efficient allocation of resources in an economy. Neoclassical economists believe in the self-correcting nature of the market, suggesting that economic imbalances are temporary and will be resolved automatically by market forces. They emphasize the importance of rational behavior, perfect competition, and equilibrium in the economy.

Neoclassical Economists' Focus on Unemployment

Neoclassical economists accept that cyclical unemployment can occur in the short run due to temporary market disruptions. However, they assert that in the long run, an economy will gravitate towards full employment when it reaches equilibrium. They argue that unemployment is primarily caused by various labor market rigidities, such as minimum wages, unemployment benefits, and trade unions. Thus, neoclassical economists generally do not focus on cyclical unemployment, as they believe market forces will eventually correct such imbalances.

Neoclassical Economists' Focus on Inflation

Considering their faith in market forces, neoclassical economists acknowledge that inflation can have a long-lasting impact on the economy. They argue that inflation often stems from excessive growth in the money supply, and can lead to a misallocation of resources and a reduction in the purchasing power of money. As a result, neoclassical economists are more concerned about managing inflation and maintaining the stability of the money supply to promote sustainable economic growth.

Conclusion

In conclusion, neoclassical economists tend to focus more on inflation rather than cyclical unemployment. While they acknowledge that cyclical unemployment can occur in the short run, they believe that market forces will ultimately correct such imbalances. In contrast, they view inflation as a critical issue requiring careful management to ensure the efficient allocation of resources and the stability of the economy.