Keynesian Economics vs Classical Economics
Keynesian Economics and Classical Economics are two Economic Systems & Schools of Thought concepts in AP Economics that students often mix up. In short: keynesian economics is keynesian economics holds that aggregate demand drives output in the short run and that government should use fiscal and monetary policy to fight recessions. Meanwhile, classical economics is classical economics holds that free markets self-correct to full employment in the long run, so government intervention is largely unnecessary. Here is how they compare side by side.
Keynesian economics holds that aggregate demand drives output in the short run and that government should use fiscal and monetary policy to fight recessions.
Developed by John Maynard Keynes, it argues that economies can get stuck below full employment, so active demand management (spending and tax policy) is needed. It underpins the use of stimulus during downturns and the AD-AS model's short run.
Classical economics holds that free markets self-correct to full employment in the long run, so government intervention is largely unnecessary.
Associated with Adam Smith and Say's Law ('supply creates its own demand'), it emphasizes flexible wages and prices restoring equilibrium. It corresponds to the vertical long-run aggregate supply curve and contrasts with Keynesian economics.