Classical Vs. Keynesian Models Essay

922 WordsJul 5, 20154 Pages
Classical vs Keynesian models Two economic models of thought are classical and Keynesian models. Each model takes a diverse approach to the economic education of financial policy, buyer behavior, and government spending. The classical model, which traces its origins to the 1770s, was the first systematic attempt to explain the determinants of the price level and the national levels of real GDP, employment, consumption, savings, and investments. Classical economist Adam Smith and others assumed that all wages and prices were flexible and that competitive markets existed throughout the economy. Classical economic theory is fixed in the theory of an (no government) unrestrictive economic market. This model especially its focus toward macroeconomics relies on four major assumptions: pure competition exists, wages and prices are flexible, people are motivated by self-interest, and people cannot be fooled by money illusion. Flexible Prices are the prices of everything; supplies, employment (incomes), property (rent), etc. must be mutually ascending and descending. However, in truth, it has been perceived that these prices are not as freely elastic downwards as they are upwards, due to a multiplicity of market limitations, resembling unions, and laws. Flexible prices confirm that markets regulate to equilibrium and decrease deficiencies and overages. Say 's Law proposes that the aggregate production in an economy must generate an income enough to purchase all the economy 's

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