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What is the difference between keynesian model and classical model in macroeconomics?

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Alec Cranford eNotes educator | Certified Educator

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Classical economic theorists believe that markets will "correct" themselves in economic downturns. Therefore they argue that government intervention to stimulate the economy under these conditions is self-defeating, because it creates government deficits on the one hand and artificial price inflation on the other. Therefore fiscal policies to remedy the effects of recessions should be minimal, if they are implemented at all.

John Maynard Keynes argued that in times of economic recession, the government should act through fiscal policy. He pointed out that governments could create demand through policies that put people to work and thus put money in their hands. In short, he thought that governments should intervene in economic crises (like, for example, the Great Depression) to jump-start the economy. Keynesians argued after World War II that the United States government should continue spending in order to avoid an economic downturn after the boom period of the war. Markets may correct themselves in the long run, but as Keynes himself famously put it, "in the long run, we're all dead."

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pohnpei397 eNotes educator | Certified Educator

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The major difference here is that the Keynesian model believes that government involvement is necessary, at least when the economy is in a deep recession.  The classical model believes that the economy is self-correcting and that it will always be able to return to its equilibrium without government intervention.

The Keynesian model argues that the aggregate supply curve is flat (at least in a deep recession).  This means that the government will need to move the aggregate demand curve by spending more money.  By doing this, the government increases GDP without increasing the price level.

The classical model argues for a vertical AS curve.  It says that government actions that move the AD curve will only affect the price level, not GDP.  Therefore, it says, the government should stay out of the way and let the economy correct itself.  The economy will get back, in the long run, to full employment without inflation.

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