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Explain the meaning of aggregate supply (AS). The classicists believed that saving and investment were equal at the full employment level and in case of any divergence the equality was brought about by the mechanism of rate of interest. Besides, every bit of Keynesian analysis has been criticised, such as aggregate demand, aggregate supply, the consumption function, the investment function, the monetary theory, etc. One significant difference between Keynesian Economics and Classical Economics is how they foretell how the economy could turn out. 4. The Keynesian theory of interest rate determination has been severely criticised by post-Keynesian economists, keynes made the rate of interest determined by the demand for and supply of money. Further, Keynes neglected the relationship between capital stock and investment. Another weakness of the Keynesian theory is that it is based on the unrealistic assumption of perfect competition. Therefore, Classicals advocated for a free economy. The demand for money arises from the transactions motive, the precautionary motive and the speculative motive. Keynes's income‐expenditure model. Prices, wages and interest rates may not be flexible due to presence of monopolies and trade unions. Moreover, in America deficit spending by the government led to inflation instead of raising the volume of employment. Elements Labor Demand Vertical Labor Supply Positive Wage equation Negative Prices Constant Key Measures Lower Interest Rate, increase aggregate demand Elements Labor Demand Negative Labor Supply Positive Wage equation Positive Prices Variable Key Measures Real wage moderation, lower subsidies and pay … Few would gainsay that Keynes “opened up new vistas and new pathways to a whole generation of economists,” but many would now consider his analysis less than adequate for meeting such special problems as cyclical forecasts and controls, persistent inflation, the maintenance of full employment, booms, secular growth, non-linear structural relations and macro-functional distribution. 1. Keynes himself remarked, “In the long-run, we are all dead.” He, therefore, assumed a given stock of capital equipment, existing technique, tastes and habits of the people, organisation, size of population, etc. Why? They are the wealth effect, technological change, education, expectations, attitudes toward assets, etc. A comparison of the classical and the Keynesian models of income determination are given below: The classical and the Keynesian models, given above in the notational form, refer to the working of the macro – level economic system in three markets, i.e. As a result demand for labour would continue to rise until unemployment is removed from the labour market. approaches: the Classical theory of unemployment and the Keynesian theory of unemployment. Therefore, total spending, output, investment and interest rates are expected to remain unchanged in the long run, according to classical theory. Keynes, on the other hand, integrated monetary theory and value theory. But this need not be a full employment level since equilibrium can be below the level of full employment. not everything produced will necessarily be purchased. This weakness stems from his efforts to formulate a pure monetary theory of interest and his rejection of the Wicksellian natural rate of interest. The Great Depression led to break down of Classical theory.It was at that time that J.M. Full employment equilibrium is a normal situation. Features of Keynesian Theory of Employment 3. (a), 232, Block C-3, Janakpuri, New Delhi, wages and prices are assumed to be flexible downwards. However, his 'The General Theory of Employment, Interest and Money' (1936) won him everlasting fame in economics. Determination of Equilibrium Level 7. (ii) Demand creates its own supply: Aggregate demand for goods and services directly determines the level of output, income and employment. Symbolically: C = f(Y).Consumption function (linear, i.e., straight line consumption function) is represented by the following equation.Thus total consumption (C) comprises two components (i) Autonomous Consumption  not influenced by income, and (ii) Induced Consumption (bY) influenced by income. He was a dunce. Classical theory of unemployment affirms unemployment depends on the level of real wages. Introduction to Keynesian Theory: Keynes was the first to develop a systematic theory of employment in his book. Keynes is considered to be the greatest economist of the 20 th century. The General Theory of Employment, Interest and Money (1936). Another criticism of the Keynesian economics is that it is applicable to the short-run. Thus the direct relationship between effective demand and the volume of employment is fallacious. They believe Some of the criticisms are discussed below: (a) To fight unemployment, Keynes recommended the policy of deficit spending. In fact, aggregate demand in the economy is the driving force that determines the level of output, employment and income. Policy of ‘Laissez Faire’ 4. The core issue of macroeconomics is the determination of level of income, employment and output. Till early 1930s, classical economy advocated that, an economy would not reach equilibrium until full-employment is restored. Fall in aggregate demand was so severe that investment came down to its minimum level resulting in vast unemployment. The premise of full employment runs throughout the whole structure of this theory. Its main tools are government spending on infrastructure, unemployment benefits, and education. Content Guidelines 2. Keynesian Theory of Income and Employment: Definition and Explanation: John Maynard Keynes was the main critic of the classical macro economics. J. M. Keynesian theory is a general theory. Keywords: Classical, Keynesian, economics, theories, policy, debate, implications. Keynesian Model 9. 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