In the Keynesian macroeconomic model aggregate demand is equal to the sum of consumption and income. Classical Vs Keynesian Economics 1235 Words | 5 Pages. Wage-Cut Policy as a Cure for Unemployed Resources 5. Assumption of Full Employment 2. Keynesian horizontal quizlet: Expectations augmented classical vs. keynesian: fluctuations around long run immediate short run: Demand tutor2u rightward shift: Shifts demand demand downward: Expenditures given extreme keynesian: long run determined keynesian range short run: Classical vs. keynesian keynesian range short run Emphasis on the Study of Allocation of Resources Only 3. ADVERTISEMENTS: The following points highlight the six main points of differences between Classical and Keynes Theory. The Keynesian Approach: Liquidity Preference: Keynes in his General Theory used a new term “liquidity preference” for the demand for money. Should economic policy be focused on long term results or short term problems? So the main difference lies on price flexibility and the power of increasing output through aggregate demand stimulus. The differences are: 1. If demand changes, the effect will be entirely on output. Keynesian economists believed that aggregate demand for goods and services not meeting the supply was one of the most serious economic problems. False Question 30 2.94 / 2.94 pts If intended business investment declines by $100 the Keynesian multiplier effect implies that total income will decrease by more than $100. Keynesian … It is based on Walrasian assumptions, rational expectations and arose out of the failures of the Old Keynesian schools during the … Keynes suggested three motives which led to the demand for money in an economy: (1) the transactions demand, (2) the precautionary demand, and (3) the speculative demand. Classical economists had looked at the equilibrium of supply and demand for individuals, but Keynesians focuses on the economy as a whole. Classical economics emerged from the foundations laid by Adam Smith in his book An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776. Should the government influence the economy or stay away from it? It is in this sense that money is a veil or neutral in the classical system. Policy of ‘Laissez Faire’ 4. New Classical Economics. Correct! True Correct! Excessive saving, saving beyond investment, is a serious problem that encouraged recession and even depression. The Keynesian View: Monetary Equilibrium: The Keynesian theory assigns a key role to money. It contends that a change in the money supply can permanently change such real variables as the interest rate, the levels of employment, output and income. Overview – The New Classical school is the modern adaptation of the classical school (see above). Classical Economics Vs. Keynesian Economics: The Key Differences. Assumption of Neutral Money 6. 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