What is the Difference Between Classical Economics and Keynesian Economics?

Classical economics and Keynesian economics are both theories of economics, but they have different approaches to understanding the economy. Classical economics focuses on the supply and demand of goods and services, and it believes that the market should be allowed to naturally adjust itself. Keynesian economics, on the other hand, suggests that the government should intervene in the market to provide economic stability.

Supply and Demand

Classical economics is based on the idea that the market should be allowed to naturally adjust itself through the forces of supply and demand. This is known as the “invisible hand” of the market. Classical economists believe that prices and wages should be determined by the market, and that the government should not interfere.

Keynesian economics, on the other hand, suggests that the government should intervene in the market to provide economic stability. This is done by using fiscal and monetary policies to increase or decrease the demand for goods and services.

Price and Wage Determination

Classical economics argues that prices and wages should be determined by the market. This means that the government should not interfere in the setting of prices or wages.

Keynesian economics, however, suggests that the government can use fiscal and monetary policies to influence the setting of prices and wages. For example, the government could lower interest rates to encourage businesses to borrow money and invest, which could lead to higher wages.

Role of Government

Classical economics believes that the government should not intervene in the market. This means that the government should not interfere with the setting of prices and wages, or with the supply and demand of goods and services.

Keynesian economics, on the other hand, suggests that the government should intervene in the market to provide economic stability. This is done by using fiscal and monetary policies to increase or decrease the demand for goods and services.

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