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Compare and contrast classical economics and Keynesian economics. What are the major differences between them?

  • Compare and contrast classical economics and Keynesian economics. What are the major differences between them?

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Expert Solution

Classical economic theory is based upon the concept of laissez-faire. Laissez-Faire--also known as the free market has little to no government intervention. It also allows individuals to act according to their own self-interest for taking economic decisions. This ensures economic resources are allocated according to the desires of individuals and businesses in the marketplace.

The Keynesian economic theory based on spending and aggregate demand to define the economic marketplace. Keynesians believe that the aggregate demand is often influenced by public and private decisions. Public decisions represent decisions by government agencies. Private decisions include individuals and businesses in the marketplace. The Keynesian economic theory relies heavily on the fact that a nation’s monetary and fiscal policy can affect its economy significantly.

For example in a situation of recession Classical model relies on overcoming labor market imperfections to get economy back to equilibrium. where as Keynesian model stresses on greater role of expansionary fiscal policy to overcome recession

Rahul Sunny answered 8 months ago
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