Compare And Contrast The Classical And Classical Economic Model

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The Keynesian and Classical economic models
The classical economic model was developed in the late 18th century and was popular before the great depression. It states that the economics is very free flowing while wages and prices are freely adjustable. The classical economic model assumes that the market is self- regulated and prices are flexible for goods and wages. Adam Smith, father of modern economics, utilized the concept of “self- interest” to simply explain this economic model. “In a market economy, individuals own most of the resources available, labor, land and capital, and use voluntary decisions, made in self-interest, to control the marketplace.” (Investopedia) Jean Baptiste Say’s rule stated “production is the source of demand.” (Investopedia) In other words, when people create a product or a service, they will get paid for it and in turn will use that payment to demand other goods and services they desire.
The Keynesian economics model was developed by the British economist John Maynard during the 1930s in an effort to comprehend how the Great Depression occurred. Keynes economic model discusses the total spending of the economy. The Keynesian model states that an economy can operate below full capacity due to presence of market imperfections, therefore there would be needs for expansionary fiscal policies or government intervention in regulating the market. Keynes developed the theory of money illusion; a theory that states “that many people have an illusory
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