The differences between the classical model of economy and keynesian version

Just a healthy state where the economy might be operating.

Similarities between keynesian and classical economics

It is worth noting that Roosevelt's New Deal and other policies increased the supply of money in the economy. It does not decrease, it doesn't change its spending, but it lowers tax revenue. Classicals had great faith in price mechanism, profit-motive, free and perfect competition and the self-adjusting nature of the system. The Keynesian model makes a case for greater levels of government intervention, especially in a recession when there is a need for government spending to offset the fall in private sector investment. More recently, the financial crisis led President Obama and other lawmakers to address economic problems by bailing out banks and fixing underwater mortgages for government-owned housing. By spending less this causes a further fall in demand. The classical view suggests that real GDP is determined by supply-side factors — the level of investment, the level of capital and the productivity of labour e. Basing their reasoning on the existence of free and perfect competition in the product and labour markets, classicals argued that the unemployed workers will cut down wages leading to a fall in prices, which, in turn, will encourage demand giving a fillip to sales. Rationality and confidence Another difference behind the theories is different beliefs about the rationality of people. Keynes would say, "Look, let's think "of a very simple idea. Unemployment and Inflation Keynesian enthusiasts favor government involvement and are more concerned about people having jobs than they are about inflation. Classical theory is the basis for Monetarism, which only concentrates on managing the money supply, through monetary policy. The real medium run supply curve or short run aggregate supply curve.

President Roosevelt followed next and focused his administration's efforts on increasing demand and lowering unemployment. Difference in policy recommendations 1.

The market will adjust itself to any shortages and surpluses of products.

classical vs keynesian economics ppt

Phillips Curve trade-off A classical view would reject the long-run trade-off between unemployment, suggested by the Phillips Curve.

Whether Keynesian or classical economists are correct in their views cannot be determined with certainty. If both types of economists were equated to motorists, monetarists would be most concerned with adding gasoline to their tanks, while Keynesians would be most concerned with keeping their motors running.

Compare and contrast the classical vs. keynesian view

They believe short-term problems are just bumps in the road that the free market will eventually solve for itself. Markets will find their own level of equilibrium without interference by people or the government. You have the price would go up and you would just experience inflation with no increased output and there's multiple ways you could've shifted that aggregate demand curve to the right. Keynesians place a greater role for expansionary fiscal policy government intervention to overcome recession. Keynes would say, "Look, let's think "of a very simple idea. The only way that you can increase the output of economy is by making it more productive. We've already seen it, the classical view is that in the long run, an economy's productivity, or productive capacity, or its output shouldn't be dependent on prices. All that happens is that the price goes from this equilibrium price to this equilibrium price over here.

On the other side, if we're performing well at potential, then all of a sudden the government wants to do Keynesian policies and we'll see in future videos, the government will always want to do Keynesian policies, even if they're not justified.

Let me do it in magenta. What could possibly be done, given, the composition and volume of the real national income, was a more efficient allocation of the given resources. Classicals completely ignored the precautionary and speculative motives for holding money. References 3.

Rationality and confidence Another difference behind the theories is different beliefs about the rationality of people. I already did my first mispronunciation. Keynesians believe prices should be more rigid and that government should try to maintain price stability.

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Differences between Classical and Keynes Theory