In this essay "Keynesian Economics Vs. Classical Economics" author aims to analyse differents between two schools of thoughts about macroeconomics, including their understandings of the behavior of prices…
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The Keynesian and Classical economics also differ on their understandings of the behavior of prices. Whereas classical economics view prices and wages as flexible, Keynesians view them as inflexible or sticky downwards. For this reason, Keynesians do not think prices can be relied on to quickly drop and pawn the adverse effects on employment that can result from a decline in total demand. Since prices do not drop, there is no mechanism to ensure that full employment will automatically be restored. The Classical and Keynesian economics also differ in the desirability of an active role by government in maintaining the economy as close as possible to a non-inflationary, complete employment level of output. The Classical economics holds that the government should assume a less active role in stabilizing the economy. They believe that the economy if left alone will incline to run at its full (or natural) employment output (Tucker 484). Overall price and employment levels are the greatest concern in the economy. If government views its primary responsibility as keeping markets as free as possible, the resulting movement of wages and prices should lead to the adjustments necessary to ensure natural or full employment levels. Conversely, Keynesians believe the government should play a more lively function in stabilizing the economy. According to the Keynesian model, there is no reason to expect an economy, left alone, to reach a full employment level of output automatically (Tucker 484). According to Keynes, unemployment, or a recession, occurs due to lack of spending.
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