Classical VS Keynesian Debate

Classical Vs Keynesian Debate

Topic	Classical	Keynesian
Modern Followers	Adam SMith J.B.Say David Riverdo Alfred Marshall	J.M. Keynes
Say’s Law	Supply creates its own demand Production=income=spending Under Spending is unlikely Whatever output is produced it will be demanded	Demand creates its own supply Depressions refute Say’s Law Underspending persists
Savings and Investments	Saving=Investment Income Savings (leakage) = Investment(injection)	Savings Do not Equal Investment Different MOtivations Savings Investment Future Needs Interest Rate Precaution Rate of Profit Expectations Habit Income Level Interest Rate
Loanable Funds (Ig=Gross Investment) (r=Interest Rate) (Sr=Supply of Money)	Savings=Supply of $ Investment=Demand for $	Investment from savings, cash, and checking accounts. Lending creates money Inflation and Unemployment are unstable.
Wage/Price Flexibility	Prices and wages are flexible downward	Prices and wages are inflexible downwards (Ratchet Effect)
Supply Curve	Vertical	Horizontal
Output and Employment	AS determines output and employment	AD determines output and employment
Unemployment (S=Savings) (I=Investments)	It rarely exists due to wage/price flexibility. Cause is External Ex. War	It usually exists Cause External - War            Internal - Savings don't equal Investment
Aggregate Demand (AD)	AD determines the Price Level AD is reasonably stable in the money supply Laiza Fare is self regulatory	AD changes due to its determinants. AD is unstable even if money supply is stable due to fluctuations/inflations spending
Basic Equation	MV=PQ	C+G=Ig+Xn
Role of Government	Monetary Rule Maintain a Steady Money Supply Laissez fare is the best and the Economy is self regulatory	Believe in Fiscal Policy (Tax and SPend) Active Government Economy is not self regulatory
Inflation (%Change PL Increases)	Caused by too much Money	Caused by too much Demand
How long the short run is	A Short Time	A very long time
Emphasis Today	Micro Economics	Macro Economics
Extra	Trickle down effect (rich first then everyone else) Long run economy is balanced at full employment Believe competition is good Invisible Hand- government and economy self regulates.	AD is the Key not AS Leaks and Savings can cause recessions Long Run - all dead