Eco 372 Week 2 Dq #1

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Explain the viewpoints of classical and Keynesian economists. How did the economy that existed at the time of these theories influence them? Which theory is more appropriate for the economy today? Why?

The Classical economist theorizes that the more capital that is available within an economy the more the economy will grow; through saving and investing people are able to increase capital and translate this capital into economic growth. Sometimes referred to as laissez faire economics, classical theory emphasized growth, free trade, and competition, as free from government regulation as possible. Under classical thought, when individuals pursue their own interest, society as a whole benefits. In addition, classical economics believes that the economy rises and falls to its natural output and its healthy level of unemployment in the long run. At the time this theory of economics was created there was a natural rise and fall of the economy based on the rate of employment. As unemployment went up the invisible hand guided the markets, the economy, and inflation in a way that aided in returning the country’s economy to a healthy state.

During the time of the Great Depression the Classical economic theory was put into serious question and made way for Keynesian economic theory. Keynesian economics believes that unlike Classical economics supply creates its own demand and that businesses based their production decisions based on expected demand. In addition Keynesian states the level of total spending in the economy could be inadequate to provide full employment and that adjusting interest rates and flexible wages was not the answer to fixing an economies unemployment problem. The economy during the Great Depression, the period when Keynesian economics became popular, the unemployment rate fell to 25 percent and remained above 15 percent for at least 10 years. Classical economics states the drop in unemployment would eventually cause the market to right itself,...