194 Why It Matters: Keynesian and Neoclassical Economics

Why identify, compare, and apply key features of Neoclassical and Keynesian economic models?

Macroeconomic theory is both interesting and challenging because there is no single, universally accepted view about either how the economy works or what the appropriate role for government macro policy should be. Throughout history, there have been two competing perspectives about these questions, which we call Keynesian and Neoclassical economics. The views have had different names at different times, such as Classical and New Classical economics or Neo Keynesian and New Keynesian economics, but while these views have become more nuanced, the basic perspectives have remained the same.

This module will present both perspectives in the context of the Aggregate Demand-Aggregate Supply model.Reality is complicated, which is the reason economists build and use models. In order to do justice to each perspective, the module is longer and more complicated than most modules in this course.

As you work through the module, instead of asking which perspective is correct, you should be guided by the following question: Under what circumstances does each perspective make sense? Also consider:

• What do the Keynesians and the Neoclassicals believe causes economic growth?
• What do the Keynesians and the Neoclassicals believe causes business cycles?
• What do the Keynesians and the Neoclassicals believe causes unemployment?
• What do the Keynesians and the Neoclassicals believe causes inflation?
• To what extent can government stimulate the economy or slow it down?
• To what extent should government attempt to stimulate the economy or slow it down?

There is a lot to learn here, so let’s dive right in.

LEARNING OUTCOMES

• Understand the tenets of Keynesian Economics and apply the tenets through the aggregate demand and supply model
• Use the Expenditure Output model to explain periods of recession and expansion
• Understand the tenets of Neoclassical Economics
• Apply the tenets through the aggregate supply and demand model
• Compare and contrast the circumstances under which it makes sense to apply the Keynesian and Neoclassical perspectives