Question

What are the differences between classical theory and what Keynes believed?

What are the different phases of the business cycle, and how are production and employment affected in each phase?

Answer 1

1) Differnce is that The Classical Theory believes that full-employment is the employment level the economy will return to, and tends to remain at in the long run whereas the Keynesian Theory holds that unemployment is the normal state of the economy and significant government intervention is required if employment/output targets are to be reached.

2) There are 4 distinct phases in business cycles:

• expansion,
• peak,
• contraction, and
• trough

An expansion is characterized by increasing employment, economic growth, and upward pressure on prices.