This document summarizes and compares classical and Keynesian economics. Classical economics is centered around self-regulating markets that operate at full employment, while Keynesian economics recognizes markets do not always self-adjust and the economy can operate below full employment. Key differences include classical economics believing free markets are always stable versus Keynesian thinking they are unstable. The document also outlines Keynesian principles like markets clearing slowly and government intervention being desirable to stabilize the business cycle through fiscal and monetary policies.

1. Classical & keynesian
Economics
BY RANGANADH
SIITAM

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. 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. 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. Keynesian Economics
 Who
 John Maynard Keynes
CENTRAL PRINCIPLE
The economy often operates at less than full
employment; market system does not self adjust.

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. 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. Keynesian Economics
 Demand becomes much bigger driving force
 Supply will adjust to demand
 According to Keynes; Demand creates its own
supply”

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. 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. 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. Classical & Keynesian Economics