Answer to Question #252672 in Macroeconomics for kay

Question

What do you see the essential difference between the classical and Keynesian theories of aggregate demand

Answer 1

The classical model assumes that the economy is always at full employment. This means that everyone who wants to work is working and all resources are being fully used to their capacity. This model shows aggregate supply curve as vertical because it holds that the economy is at its full employment level.

On the other hand, the Keynesian model assumes that the economy is not always at full employment, i.e. the economy can either be above or below its potential. For instance, during great economic depression, there is widespread unemployment, many businesses fail and the economy operates at a much less potential. The aggregate demand curve in this model is a representation of the total demand in the economy. The aggregate supply curve is upward sloping because wages and prices are less flexible in the short run.