Question

Compare the classical economic theory that was used prior to the Great Depression to the Keynesian theory used after the Great Depression.

Answer 1

Answer:-

Comparision:-

1) Concept of Unemployment:- According to CLASSICAL  economist: the involuntary unemployed person is who is ready to work at the existing rate but does not get work. And According to KEYNESIAN view is that an Involuntary unemployed is who is willing to work less then existing rate of real wage.

2) Concept of equilibrium:- CLASSICAL view that the economy is in equilibrium when demand is equal to supply. Full employement is the basic feature of capitalist economy and at the point of equilibrium there should be full employement. And KEYNESIAN view is that, the equilibrium is possible even when there is underemployement in the economy.

3) Relative importance on demand and supply:-   CLASSICAL economist are more stress on aggregate Supply while KEYNESIAN theory gives more importance to aggregate demand.

4) Function of Money:- CLASSICAL economist say that the function of money is to serve as a medium of exchange. And money is use to buying things. And it cannot be store. But KEYNESIAN say that the money is also serve as a store value and money is use to keep in liquid form because people use it for three motive:- 1:- Transactionary motive, 2:- Precautionary motive, 3:- speculative motive.

5)Rate of Interest:- CLASSICAL economist believe that the interest is determined by Real factor and the rate of interest is determined where the saving and investment are equal. But KEYNESIAN believe that the rate of interest is determined by Monetary Factor. And the rate of interest is determined where the demand for money is equal to supply of money.

6) Government intervention:- CLASSICAL economist believe that there is laissez-fair policy, means there is no government intervention. But KEYNESIAN believe that there is need of government intervention(spending) either from the point of view for welfare or for the autonomous investment.