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Macroeconomics

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Moderate

Classical Versus Keynesian Economics

MACRO-HJFJ8K

You are in a bar and hear some economists arguing about whether or not the government should increase spending in a recession. There is a group of classical economists and another group of Keynesian economists. Below is a conversation you would likely overhear at the bar. Fill in the blanks with the appropriate term/phrase.

Classical Economist: “You are wrong, wages and prices are

and so any unemployment will be short lived and the economy will

.

Keynesian: While it is true that over time labor markets will

, wages are

and your point about Say’s Law is not entirely accurate. If people save their money and aggregate demand is reduced, it is not necessarily true that

will stimulate

and fully offset the associated fall in consumption.