Keynesian and Classical Economic Theory

Jazmin Villegas Hernandez

Mr. Owen

Macroeconomics

March 20, 2019

Keynesian and Classical Economic Theory

What is the Keynesian economic theory? The Keynesian economic theory is an economic theory of total spending in the economy and its effects on output and inflation. What is Classical economic theory? The classical economic theory refers to the dominant school of thought for economics in the 18th and 19th centuries.
 How did the Keynesian economic theory get its name? Keynesian economics got its name after the British economist John Maynard Keynes who created it during the 1930s. What are some Keynesian economic beliefs? Keynesian economists believe in active government efforts to boost aggregate demand. They also believe that government actions like raising or lowering government spending or raising or lowering taxes are necessary to affect aggregate demand to achieve a desirable market equilibrium. John Maynard Keynes believed that concepts like sticky prices and wages required the government to intervene and the economy became popular during the Depression. By “sticky,” he means that prices and wages do not change freely and are instead predisposed to certain movements, generally upward, though prices more so than wages. Keynesians also believe that surpluses and shortages are problematic and must be handled. They say that when there is too much inflation or inventory, producers will produce less. Why is Keynesian economics important? it allows for increased government spending during recessionary times, and it also calls for government restraint in a rapidly growing economy. It will also benefit the economy in both the short and long run. How? By the Keynesian fiscal policy expansion. What is there to do? There are bridges and roads that need to be repaired, and also other means of travel need to be updated to be safer to travel.

What is the classical economic theory? The classical economic theory is a broad term which refers to the dominant school of thought for economics in the 18th and 19th centuries. The self-regulating democracies and capitalistic market developments are the basis of this theory. The classical economic theory helped many countries switch from a monarch rule to a capitalistic democracy that is self-regulated. Who discovered this theory? Adam Smith was an 18th-century philosopher known as the Father of modern economics who is also a major proponent of laissez-faire economic policies. The classical economic theory was developed after capitalism and the Industrial Revolution. Some of the earliest classical economists were the ones who developed value, prices, supply, demand, and distribution theories. A bigger part of the classical economists preferred free trade and competition in the midst of workers and businesses.

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