What is the major difference between the classical model and the Keynesian model? Explain.

What will be an ideal response?


The major difference is the shape of the aggregate supply curve. The classical view is that it is vertical, while the Keynesian view is that it is horizontal, or at least almost so. The differences in shape are due to differences in assumptions about the flexibility of prices. Classical economists assumed prices and wages were flexible and would quickly adjust to bring about a new full-employment equilibrium, while the Keynesian model assumes prices are not flexible.