Classical And Keynesian

Question 1

Classical assumptions (5)

Answer 1

• Pure competition exists
• Wages and prices are flexible
• Self interest is the main driving force
• Economic problems are solved by the free market
• People will not be unemployed for a long time

Question 2

Classical: Demand side policies (3)

Answer 2

• Increase in investment shifts AD right causing inflationary expansion
• Costs are higher than expected, shifting SRAS left
• Equilibrium moves back to the original point with a higher price level

Question 3

Classical: recession and restoration of full employment (3)

Answer 3

• A decline in investment shifts AD left, causing a recession
• Costs lower than expected, SRAS shifts right
• Equilibrium point goes back to its original GDP but at a lower PL

Question 4

Keynesian assumptions (3)

Answer 4

• Wages are not as flexible as classicals argue
• The minimum wage sets a floor below which wages can’t drop
• Therefore changes in AD do not necessarily change prices as the classical economists argued

Question 5

Keynesian: why governments should regulate the markets

Answer 5

• Capitalism may not be self regulating
• When in recession, AD needs to increase to increase employment
• Therefore the government need to step in and spend

Question 6

Keynesian: Government spending

Answer 6

• He argued a recession occurs due to lower consumption, investment and net exports
• This means the government needs to step in and spend money (The New Deal: FDR)