Keynes vs Classical economics

Question 1

Keynes views ( elastic LRAS)

Answer 1

In a recession, government intervention can stimulate AD and real output.

Argued in a recession, people responded to unemployment threat by saving more and spend less.

Assumes markets won’t self correct due to sticky wages, paradox of thrift, and negative multiplier affect.

Question 2

Hayeks views (inelastic LRAS)

Answer 2

Believes monetary policies are more critical than fiscal policies to stimulate growth, such as controlling money supply to keep inflation low.

Believes wages are more flexible and can be adjusted downwards to prevent real wage unemployment ( lower costs of production = more supply).