What is the key difference between the Classical and Keynesian models? Explain why monetary policy is...

What is the key difference between the Classical and Keynesian models? Explain why monetary policy is neutral in the Classical model. Explain why it is non-neutral in a Keynesian model.

Expert Solution

a)

Classical economists assume full employment conditions in economy and unemployment can not occur due to flexible nature of prices and wages. Thus, they recommended that government should not interfere in economic activities and market forces automatically restore equilibrium.

On other hand, Keynesian approach does not believe that full employment is general condition. Unemployment is frequent and might be general condition. Private system, does not automatically address issue of unemployment. Fall in aggregate effective demand causes unemployment. Aggregate demand can be addressed through the interference of government in economic activities.

Classical model believes full employment and money is neutral or money is used only for exchange of goods and services.

While keynesian believes that monetary policy can be used effectively with fiscal policy to push up aggregate demand in economy.

Rahul Sunny answered 2 years ago

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What is the key difference between the Classical and Keynesian models? Explain why monetary policy is...

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