Fundamentals of Macroeconomics

Fundamentals of Macroeconomics

Concept of Classical and Keynesian Economists

There are two schools of thought in economics: Classical and Keynesian Economists. According to the Classical Economists they believed that the market will adjust on its own while the Keynesian Economists believed that government need to take measures in order to respond to the changes occurring in the market or the economy. The Classical Economists believed that any imperfections in the market will be adjusted automatically; on the other hand Keynesian Economists rejected this thought and gave their view that in order to adjust the prices the government needs to implement market correction mechanism. The Keynesian Economists believed that in order to run the economy smoothly government must intervene through monetary and fiscal policies, whereas classical economists believed that the best monetary policy during a crisis situation is no monetary policy. The Keynesian economists have three assumptions: 1) it offers a theoretical explanation for solving unemployment during depression; 2) Macro-economy is more than just a collection of markets and 3) full employment is not possible to achieve. The three assumptions of classical economists are: 1) prices are flexible and thus it is easy to achieve equilibrium; 2) it believed the supply creates its own demand automatically and 3) saving investment equality can be achieved through changes in the interest rates.

How did the economy that existed at the time of these theories influence them?

Keynesian economics was developed during periods of great depression faced by the United States of America. The unemployment rate was at its peak during this time period and he looked at the problems of demand and supply in an economy. On the other hand classical economics was launched in order to understand the study nature and causes of wealth in the economy of a country. During the classical economists ...