Question

how is classical different from keynes theory

Answer 1

*Classical theory believes in free market and laissez faire policy. Classical theory considers government intervention as hindrance to the proper functioning of market as they believed that market functions well and reaches equilibrium when left alone. Whereas Keynesian theory advocates government intervention to bring stability.

*Classical theory always assumed full employment in the economy and there is no involuntary unemployment. They believed that full employment is a normal situation and every economy operates at full employment level, even if there is unemployment, the economy has a natural tendency to move towards full employment level. Whereas Keynesian theory suggests that full employment is a rare phenomenon and economy often operates below the full employment level.

*Classical theory assumes complete wage-price flexibility. They believed that wages and prices are completely flexible and this allowed the economy to maintain equilibrium by adjusting wages and prices. Keynesian theory believes that price and wages are sticky and hence cannot be fully adjusted to correct disequilibrium in the economy.

* Classical theory put greater emphasis on supply side of the economy whereas Keynesian theory is focused on demand side.

*Classical theory believes in neutrality of money and considers only the transaction motive for holding money and money is considered interest inelastic. Keynesian theory considers the speculative demand for money and considers it as a function of rate of interest. Keynesian theory considers money as an influential factor affecting output.

*Classical theory is more focused on long term results whereas Keynesian theory focuses on short run.