Classical and Keynesian economics

A question from Yahoo! Answers:

Describe and differentiate between Classical and Keynesian economics.?

In a nutshell, they had very different views on rigidity of wages and the nature of economy’s response to recession.

During classical times (1770-1850), wages were downward-flexible, and economies responded to contracting aggregate demand by lowering the price level. By 1900, it was no longer the case. Wages became downward-inflexible (or, as economists sometimes say, sticky), so economies began to respond to reductions of aggregate demand by increasing unemployment. Keynes was the first to point it out and offer some suggestions for coping with it.

Unlike classics, who contended that things always sort themselves out in the long-run, Keynes thought that the short-run is also important (hence, his famous phrase, “in the long-run, we are all dead”), so a government may consider employing short-term policies to limit the swings of the business cycle.

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