Question

Compare the features of the classical economic model to the Keynesian economic model. How do these models influence the aggregate demand curve and the aggregate supply curve? Which model, in your opinion, benefits the economy in the long-run?

Answer 1

The classical economic model has the following features-

1. The economy is at full employment.
2. Prices adjust freely and there are no restrictions on the upper or lower levels. They’re completely flexible.
3. There’s no government intervention

The Keynesian economic model has the following features-

1. Government intervention and policies are required to maintain the stability in the economy.
2. Monetary and fiscal policies are greatly suggested by the Keynes model.
3. The economy does not stay at full employment level always.

Effect of classical Model on Aggregate supply and aggregate demand curve –

Classical AS curve is vertical at the full employment level and does not intend to change from that level. It says that the economy will operate on this level only, may it have different price levels. Thus, the equilibrium stands at full employment level of the economy. Prices may move up or down but the production will remain the same.

According to this model, the economy will remain stable or move back to stability automatically if there’s any downturn of the economy in future.

The aggregate demand curve stays the downward sloping curve.

Effect of Keynesian Model on Aggregate supply and aggregate demand curve –

The model got introduced immediately after the great depression. According to the model, the economy is not at full employment level. The unemployment was very high and the people were losing jobs at a greater number because of aftereffects of the recession. The prices are flexible and the output is also adjustable according to Keynes. The aggregate demand curve and aggregate supply curve are as follows-

I’d say Keynesian model is better for the economy in the long run. It is because the classical model doesn’t really fir into present complexities of the market conditions. There cannot be no intervention of government. And a price doesn’t come back automatically to equilibrium automatically after the recession. All the features of classical cannot be fit in here in today’s economies. Keynesian model suggests the best policy measures and can be really productive in terms of economic growth in long run.