Classical Theory

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Date Submitted: 09/23/2012 05:46 PM

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Keynesian economics is the theory of total spending in the economy and the effect that it has on output and inflation (Vitez, 2011). A Keynesian economist believes that the demand is influenced by a variety of economic decisions whether they are public or private. Keynesian’s also believe that the Monetary Policy is powerless, and some monetarists believe that the fiscal policy is powerless. The Keynesian theory changes the demand whether anticipated or unanticipated and they have a great effect on real output and employment, not on prices (Patil, 2011). It is believed that the monetary policy can produce real effects on output and employment if some prices are stiff and Keynesians try to explain stiff prices or wages.

The Classical economic policy is rooted in the concept of free market which requires little to no government intervention (Vitez, 2011). Classical economists believe that the best monetary policy during a crisis is no monetary policy (Patil, 2011). This theory allows individuals to act according to their own interest in regards to economic decisions. Classical economics uses the value theory to determine prices on the economic market and the items value is based on the production output, technology, and the wages that are paid to produce the items. Classical economists believe that the prices of everything must be flexible both upwardly and downwardly.

Both theorists believe that it is a known fact that the future economic expectations affect the economy as a whole. They have different opinions on the best way to handle the effects. Keynesians argue for corrective government intervention and Classical theorists rely on people’s selfish motives to sort the system out. I for one am more in favor of Keynesians because I believe that government intervention is more reliable than individual intervention as a whole. I believe that our glass difference makes the lower class more susceptible to undo influences of the higher class individual. And, that...