How does Keynesian economics differ from classical economics?
1 Answer
Classical said that we are always on the full employment level and only voluntary unemployment may be there but as voluntary unemployment means we are using resources fully so we are on the production possibility curve. Hos point of view was that wages are flexible and only there is voluntary unemployment for example when Aggregate demand decreases demand for Labour decreases so at lower wage people who are not willing become voluntary unemployed so we are on PPC so that's why his ling run aggregate supply is vertical.however Keynesian believes that wages are sticky people don't bear there wage cut they become involuntary unemployed I.e. the firm don't want to increase cost of production thus make people unemployed redundant in other words though workers want to work trade union cause wages not to fall when we make diagram there is massive unemployment and his LRAS curve is horizontal he said that government spending should increased to increase AD.cuz at this stage workers are made redundant and the worker from fear of losing job work overtime so increase in AD can build confident in workers. He don't agree with classical and said that economy is not always at full employment when there is recession money supply increase don't increase price as classical said In Fisher equation MV=PT and V and T are constant so when money supply doubles price doubles
