The first three describe how the economy works. ... price and quantity are considered basic measures to gauge the goods produced and exchanged. Assumptions in Microeconomic Theory. We're talking about two models that economists use to describe the economy. Keynesian Assumptions: An Introduction Today, I’m starting to do a series of posts where I contrast some of the key assumptions of the Classical and Keynesian models of economic theory. Keynesian economics gets its name, theories, and principles from British economist John Maynard Keynes (1883–1946), who is regarded as the founder of modern macroeconomics. His most famous work, The General Theory of Employment, Interest and Money, was published in 1936. Keynes’s 1936 book, The General Theory of Employment, Interest and Money, was to transform the way many economists thought about macroeconomic problems. Suppose that the economy is initially at the natural level of real GDP that corresponds to Y 1 in Figure . Therefore, he made the specific assumption of short-period so as to concentrate on the problem at hand. 1. Keynesian economics is a theory of total spending in the economy (called aggregate demand) and its effects on output and inflation. The Keynesian theory of the determination of equilibrium output and prices makes use of both the income‐expenditure model and the aggregate demand‐aggregate supply model, as shown in Figure . I cannot stress enough the importance of such an exercise. The following points highlight the six main points of differences between Classical and Keynes Theory. Keynesian Theory of Income and Employment: Definition and Explanation: John Maynard Keynes was the main critic of the classical macro economics. Keynes assumed that the techniques of production and the amount of fixed capital used remain constant in the model… Wage-Cut Policy as a Cure for Unemployed Resources 5. Policy of ‘Laissez Faire’ 4. The Keynesian Model and the Classical Model of the Economy. The differences are: 1. Keynesian theory was first introduced by British economist John Maynard Keynes in his book The General Theory of Employment, Interest, and Money, which was published in 1936 during the Great Depression. A Keynesian believes […] Assumptions (1) The Short Period: Keynes was writing about the short period problem of depression. Although the term has been used (and abused) to describe many things over the years, six principal tenets seem central to Keynesianism. • Classical economic theory is the belief that a self regulating economy is the most efficient and effective because as needs arise people will adjust to serving each other’s requirements. Keynesian theorists believe that aggregate demand is influenced by a series of factors and responds unexpectedly. Classical economics was founded by famous economist Adam Smith, and Keynesian economics was founded by economist John Maynard Keynes. Assumption of Neutral Money 6. Assumption of Full Employment 2. 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