Macroeconomic Viewpoints | Macroeconomics | Summary and Q&A

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December 12, 2018
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Macroeconomic Viewpoints | Macroeconomics

TL;DR

The classical model believes in self-adjusting economies, while the Keynesian model advocates for government intervention to stabilize economic fluctuations.

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Key Insights

  • ๐Ÿฅบ The classical model failed during the Great Depression, leading to the development of the Keynesian model.
  • ๐Ÿƒ Classical economics focuses on long-run growth and emphasizes the importance of supply-side policies.
  • ๐Ÿƒ Keynesian economics prioritizes short-run fluctuations and advocates for government intervention to stabilize the economy.
  • ๐Ÿซต The Phillips Curve is viewed as vertical in the classical model, suggesting no long-run trade-off between unemployment and inflation.
  • ๐Ÿ‘จโ€๐Ÿ’ผ The Keynesian model recognizes the negative impact of certain phases of the business cycle on employment levels and seeks to address this through fiscal policies.
  • ๐Ÿฅบ Classical economics supports letting markets take the lead, while Keynesian economics emphasizes the role of government in economic stabilization.
  • ๐Ÿ˜š The classical model focuses on full employment GDP, while the Keynesian model aims to keep employment levels consistent and close to full employment.

Transcript

macroeconomic models are ways of predicting the behavior of the economy and there are two models that dominate modern thinking the classical model and the Keynesian model the classical model was popular before the Great Depression and argues the economy is self adjusting in good times wages and prices rise while in bad times wages and prices fall p... Read More

Questions & Answers

Q: What is the main difference between the classical and Keynesian economic models?

The main difference lies in their approach to economic stabilization. The classical model believes in self-adjusting economies, while the Keynesian model advocates for government intervention.

Q: How do the classical and Keynesian models view the role of wages and prices?

The classical model asserts that wages and prices are flexible and will adjust back to full employment GDP in the long run. In contrast, the Keynesian model views them as sticky and unresponsive to changes in aggregate demand in the short run.

Q: What policies does the classical model support for long-run economic growth?

The classical model favors supply-side policies like low tax rates, competition, and removing monopolies. It also highlights the importance of savings, investments, education, technology, and research and development.

Q: How does the Keynesian model suggest dealing with economic fluctuations?

The Keynesian model suggests implementing expansionary fiscal policies in cases of recessionary gaps and contractionary fiscal policies in times of inflationary gaps. These policies aim to shift aggregate demand and smooth out short-run fluctuations.

Summary & Key Takeaways

  • The classical model suggests that the economy self-adjusts through fluctuations in wages and prices, but the Great Depression showed its limitations.

  • The Keynesian model argues that governments should implement fiscal policies to stabilize the economy.

  • Classical economics focuses on long-run growth, while Keynesian economics emphasizes short-run fluctuations and employment levels.

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