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Economics Classical vs Keynesian

In: Business and Management

Submitted By dolphinoh
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Homework 3

* Explain differences between Keynesian and Classical Economics.

The differences between Keynesian and Classical Economics are as follows: Keynesian economics believe that when the economy is in a recession that price and wage remain the same and are inflexible. Wages are unable to be lowered beyond a certain point due to union contracts and minimum wage laws and will not be raised due to the supply of unemployed workers willing to work at the prevailing wages and the price of goods remain fixed due to steady supply and no change in demand. In order to jump start the economy Keynesian economics suggest that increased government spending will increase the GDP thereby shifting the aggregate demand curve which can help jumpstart the economy by creating more demand and resulting in the demand for labor to meet that demand. The classical economics viewpoint is that the economy will self-regulate over time and the government should take hands off approach. They believe that price and wage will remain flexible and increase or decrease as needed to maintain equilibrium in the economy. * In your opinion when (if ever) should the government use Keynesian economic policy?
I believe the government should follow the Keynesian economic policy in times of recession such as they did in the most recent one in 2009. The Keynesian policy will help increase the aggregate demand by raising the GDP which will create the need for workers to meet that demand. This helps decrease unemployment and thereby provides workers with income to spend on finished goods which create even more demand and a higher GDP.

* When (if ever) should the government use Classical economic policy?
In times of recession a hands off approach I believe the classical economics model would cause more harm over a longer period. Wages and prices are not as flexible as believed when...

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