Classical Vs Keynesian Economics

1235 WordsApr 21, 20175 Pages
Classical and Keynesian economics are both accepted schools of thought in economics, but each had a different approach to defining economics. The Classical economic theory was developed by Adam Smith while Keynesian theory was developed by John Maynard Keynes. Similarities: One of the most surprising similarities between the two theories is that John Keynes developed his theory based on the Adam Smith’s theory. Keynes did not entirely disagree with Adam Smith but rather, expanded the theory based on the Great Depression. They were both capitalists and agreed on the basic tenet of capitalism- that a free market is more efficient in terms of allocating resources. Keynes, based on the Great Depression, addressed issues related to repairing…show more content…
The Keynesian Economic theory relies on spending and aggregate demand to define the economic marketplace. Keynesians believe that aggregate demand is often influenced but public and private decisions. This theory stresses that unemployment is caused by the insufficient growth and low growth of aggregate demand. Keynes urged that the economy can be below full capacity for a considerable time without intervention and, hence, the market is not fully efficient as described by the Adam Smith. 2. Aggregate supply and aggregate demand The classical view suggests that real GDP is determined by supply side factors, that is the level of investment, capital, and productivity. This suggests that, in the long-term, an increase in aggregate demand resulting from faster growth in Long-run Aggregate Supply (LRAS) would cause inflation. Thus, the Long-run Aggregate Supply (LRAS) curve is inelastic. The theory also suggests that, in the short term, the economy will be able to reduce unemployment below the natural rate by increasing demand, but, in the long run, the wages adjust, unemployment returns to its natural rate and, consequently, inflation ensues. There is no trade-off in the long run. The Keynesian views the Long-run Aggregate Supply (LRAS) differently, purporting that an economy can be below full capacity in the long-run. This theory, on the other hand, places greater

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