Classical Macroeconomics: Classical And Keynesian Economics

Macroeconomics is concerned by the overall economy and large scale economic decisions such as fiscal policy, investment and interest rates. Both classical and Keynesian macroeconomics are considered to be mainstream schools of economic thought, meaning that they both view the economy in relation to individual actions (whereas heterodox economic theorists argue that the economy is too complex to be reduced down to analysable individual behaviour). However, although classical and Keynesian economics both belong to macroeconomic schools of thought, they have many dissimilarities. The main feature of the classical model of macroeconomics is that it promotes a laizzes-faire approach to the economy in which there is little or no government intervention in the market. Whereas Keynesian macroeconomics claims that government intervention is essential for the growth and maintenance of a healthy economy. This is the main difference between the two approaches however there are many other contrasts. For example, classical economics focuses on long term development of an economy by looking at employment, tax and regulation while Keynesian economics focuses on the short …show more content…
Classical economists argue this because more people save money if interest rates rise, meaning that they will have more disposable income meaning that they will spend more. Furthermore, interest rates determine whether people make investments; if interest rates are high then people will be less inclined to invest and vice versa. If people save more then banks will have more savings to give out to investors but they will only do this at a decreased interest rate, leading to an equilibrium. This means that interest rates are the dictator of the aggregate growth of the economy according to classical