Keynesian and classical economics are two different macroeconomic thoughts, their view of consumer behavior, government spending, and monetary policies are also dissimilar in certain aspects. The Keynesian principle believes that government should be involved in the economy to assure impartiality and effectiveness, whereas the classical principle of economy believes in the free market. The principle of free market requires limited government interventions and allows the individual to act in their self-interest in their economic decisions. For example, according to the classical economic principle, the producer of an automobile should determine the value of …show more content…
“The classical view suggests that Real GDP is determined by supply side factors – the level of investment, the level of capital and the productivity of labor” (Pettinger, 2015). Therefore, the government should pursue competitive free market policies. The classical principle of a free market is that the government should give long-term solutions to the economy by letting individuals and businesses act freely based on their self-interest. If these principles were pursued, the classists believed, the unemployment could be easily mended. Moreover, they believed, in order to stop unemployment the companies could cut wages down, by doing so there would no unemployment. People with lower wages would still have some demand and purchasing power, which would keep moving the …show more content…
“Keynesians place a greater emphasis on demand deficient unemployment” (Pettinger, 2015).
The Keynesian economists believe that wages can not be reduced because workers would resist to such a proposal. Plus, workers with lower wages would be discouraged to spend or invest, that would cause deeper economic recession and unemployment. The government should spend and invest more in order to increase aggregate demand.
The Keynesians strongly believe that the government should intervene in economic matters of its people in times of recession and unemployment. The government should use fiscal policies to manage aggregate demand.
Finally, we can see that classical economic principles place emphasis on long-term solutions and Keynesian economic principle emphasizes on short-term solutions to economic problems.
What new developments starting in the 1980s have changed macroeconomic