Classical & keynesian economics

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Classical & keynesian economics

  1. 1. Classical & keynesian Economics BY RANGANADH SIITAM
  2. 2. CLASSICAL ECONOMICS  Who  Adam smith,David Ricardo,Alfred Marshal CENTRAL PRINCIPLE  The economy is best organised as a self-regulating system of markets.
  3. 3. Classical economics  WAGES AND PRICES ARE FULLY FLEXIBLE in order to clear markets rapidly.  ECONOMY OPERATES AT FULL EMPLOYMENT MOST OF THE TIME. Classical Aggregate curve is vertical
  4. 4. Classical economics  MINIMAL GOVT INTERVENTION reflecting distrust of government and belief in its inefficiency.  UNEMPLOYMENT in the economy is either Voluntary or due to some External Interference.
  5. 5. Keynesian Economics  Who  John Maynard Keynes CENTRAL PRINCIPLE The economy often operates at less than full employment; market system does not self adjust.
  6. 6. Key differences between classical vs keynesian  IN THE CLASSICAL WORLD  Free market economies are always stable  Tending towards full employment & full production equilibrium  Free fluctuating pricies in the three macro markets (Goods, money, labor)  IN THE KEYNESIAN WORLD  Free market economies are unstable  Equilibrium but no reason for full employment/full production
  7. 7. Keynesian Economics 1. MARKETS CLEAR ONLY SLOWLY, IF AT ALL A) In a depression or recession, much Employment is Involuntary. 2. ECONOMY OPERATES LESS OFTEN THAN FULL EMPLOYMENT, since market don’t clear 3. GOVT INTERVENTION MAY BE DESIRABLE TO STABILIZE THE BUSINESS CYCLE. (Fiscal and monetary policies)
  8. 8. Keynesian Economics  Demand becomes much bigger driving force  Supply will adjust to demand  According to Keynes; Demand creates its own supply”
  9. 9. Keynesian policy Implications  Under the classical system, government had no role in management of the economy- “Laissez faire” do nothing.  Under Keynes, Government must step into to correct instability of the economy.  If the economy faces recessionary gap, govt must increase demand by spending more; lowering taxes;lowering interest;  If the economy faces an inflationary gap, govt must reduce demand by spending less; raise taxes; increase interest rate;
  10. 10. US Federal govt objectives for Economy  Full employment(1933 & by Law 1946)-Federal govt took responsibility to ensure the economy functions at full employment- no more than 5% unemployment  Economic growth(1950)-Fed Govt took responsibility to ensure the economy grows at a consistent and healthy rate-Real GDP at approximately 4% year  Price stability (1970) Fed govt took responsibility to ensure the economy has stable prices- CPI increase at no more than 3% per year
  11. 11. Classical & Keynesian Economics  The economy can experience recessionary gaps or inflationary gaps  No reason why economy must come to equilibrium at full employment  Aggregate supply will always adjust to Aggregate demand not vice versa  Govt has a role and responsibility as maximizing entity to manage the economy
  12. 12. Classical & Keynesian Economics

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