As a finance student, it’s important to have a strong understanding of the different economic theories that guide financial decision-making. In this blog post, we’ll give an overview of some of the most important principle economic theories and their implications for financial markets. Whether you’re just getting started in your finance studies or you’re looking to brush up on your knowledge, this blog post will provide helpful insights into key economic concepts.
Classical economics focuses on the role of market forces in determining prices and output
Classical economics is widely studied in Series 7 exam curriculums due to its predictions about how market forces determine prices and output. Many of the fundamental theories, such as the price mechanism, established by classical economists remain highly relevant today and illustrate how economics works in the real world.
Classical economics emphasizes that market supply and demand are dictated by price changes, and strives to understand what motivates people to buy goods and services. This theory helps explain why certain products have higher prices in certain parts of the country than others. It also explains why some goods have abundant quantities while others are scarce, forming the basis for a sustainable and prosperous economy.
Keynesian economics emphasizes the importance of government intervention to stabilize the economy
Keynesian economics is an economic theory developed by renowned economist John Maynard Keynes that emphasizes the important role of government intervention in steering economies and keeping them stable. Keynes advocated for fiscal policy as a means to stimulate economic activities resulting from increased public expenditures and fiscal stimuli like tax cuts instead of focusing exclusively on market-based macroeconomic adjustments offered by classical economics at the time.
These policies were successfully applied during the Great Depression, when unemployment was skyrocketing, to restore the shaken economy to stability. Today, the principles of Keynesian economics are still highly valued in most countries, and governments around the world are routinely using fiscal policy to manage business cycles and promote a healthier national economy.
Neo-classical economics combines elements of both classical and Keynesian economics
Neo-classical economics is a school of thought that combines elements from both classical and Keynesian economics. It views price and output as the result of an interaction between supply and demand. As such, it is an equilibrium model that posits economic activity is driven by the choices made by individuals based on their preferences and costs.
This approach also recognizes market imperfections due to externalities and asymmetric information, which are factored into modern models of economics. Neo-classical economists attempt to balance short-term stabilization policies with long-term structural reforms to efficiently allocate resources within markets. While not a panacea for all economic issues, neo-classical economics is seen as an important tool for enhancing overall economic performance.
Classical economics, Keynesian economics, and neo-classical economics are the three most common types of economic theories. All three focus on different aspects of the economy and have different implications for government policy. Understanding these theories is important for anyone who wants to work in economics or finance. If you’re interested in learning more about these topics, our free Series 7 exam questions can help you out. Our course covers all the material you need to know to pass the exam and become a financial industry professional.