Question

a. What economic circumstances gave rise to the Keynesian approach to understanding the workings of the economy?
b. What are the principal differences between the Keynesian and Classical approaches to understanding the workings of the economy?

Please use nonplagarized material

Answer 1

a) Keynesian economics can be seen as an economic theory of total spending in a certain economy and it also throws light on is effect on inflation and output The British economist John Maynard Keynes came up with the concept of Keynesian economics in the 1930 so that he can provide a reason for the Great Depression. This Keynesian economics is also known as "depression economies" as the book titled "The General Theory of Employment, Interest and Money" was mainly written during a time when the entire world was facing the problem of great depression. A lot of criticism was made by Keynes towards the then British govemment The main reason was that there was a welfare deduction and increased tax by the govenment to improve the balance book of the country He expressed that this move will further demoralize the common citizens to spend money and thus the economy will not be able to revive In fact, he stated that, the govermment should invest more money, give tax exemption as it will increase the economic activities in the country and thus the economy can deal with the issue of inflation, unemployment b) The main differences between Classical and Keynesian approaches are following:

(i) According to Classical approach the economy will attain full employment level if there exist the independency on personal economical work. But according to Keynesian approach the economy cannot attain full employment level in case ofpersonal work. In this case the economy attains unemployment equilibrium condition which is less than full employment level. (ii) Classical economists think that full employment is possible by reducing nominal wage rate But Keynes thinks that there exist Trade Union and minimum wage rate regulation. Therefore, reduction in nominal wage rate is not real. (ii) According to Classical approach Monetary Theory and Employment Theory are different But according to Keynesian approach there is a connection between Monetary Theory and Employment Theory (iv) Full employment, the situation after full employment and unemployment conditions are discussed in Keynesian approach. But in Classical approach it is discussed about only full employment condition. (v) According to Classical approach the supply curve of full employment is vertical But according to Keynes total supply curve of employment is horizontal. Source: various types macroeconomic books and personal contribution