Compare And Contrast The Classical Model And The Keynesian Economic Model

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The Classical Model is an economic model that “was the first systematic attempt to explain the determinants of the price level and the national levels of real GDP, employment, consumption, saving, and investment”. (Miller, 2016) It is a model that implies that an economy is self-regulating and that the supply of goods is proof of their demand. It is based on the idea that the market is always at, or near, real GDP and that the market itself will work to bring the economy back to the real level of GDP when it variates from the said level. One of the basic components of the Classical Model is Say’s Law. J.B. Say stated that supply is what created its own demand. It is the idea that if something is produced that in turn produces income; …show more content…
This decline led Keynes to state that price levels, foremost amongst them the price level of labor had become inflexible. Keynes economic model stated that prices had become inflexible due to the interference of unions and thus the labor contracts that caused prices to become sticky. The Keynesian model states that an economy that has the massive excess capacity and unemployment will result in increases in aggregate demand that will not cause a rise in prices, and also that an aggregate demand decrease will not cause prices to be …show more content…
This affects a decline in the aggregate curve in the same way: a decline in demand causes the curve to shift leftward, but the equilibrium level remains constant. This constant of price levels, or the aforementioned “sticky prices” is what causes the inflexibility. In the Keynesian model, the flexibility of price levels, most importantly wage levels, is what causes movement along both the demand and price levels on aggregate supply curves. Without this flexibility and shifting, the economy is led to stagnation and contraction. The failure of a needed rightward or leftward shift of the price level is what the Keynesian Model unemployment tends to rise sharply. The is caused by both the inflexibility of wages, but also is an effect of inflation. In this model, the aggregate demand shifts in prices are necessary for inflation to be able to be put under control. The effects of inflation cause the price levels to be put out of equilibrium, but the increases and decreases in aggregate demand in this model allow for these price levels to change, therefore causing the needed deflationary, or when needed, inflationary changes which in turn cause the economy to regain equilibrium. In closing, the key difference in the Classical Economic model and the Keynesian Model is the flexibility of prices. While the Classical Model is one that uses supply to make its own demand,

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