Introduction. The American Great Depression in 1929 is a very symbolic event that perfectly explains the differences between the Keynesian and the Classical theories. It was a tremendous event that discussed the previous Classical theories and confirmed the new ideas from Keynes. The Classical economics are mainly linked to David Ricardo, who believed the economy was able to balance its own and at the same time, fix some temporary periods of unemployment or production. According to Classical theories, the long-run will set and solve problems related to prices, wages and consumption. Keynes, long recessions, demand, investments, fiscal and of monetary policy. Keynes was worried for “long recessionary gaps” and for their tremendous effects in terms of lost of job places, absence of wages, fall of consumption and other …show more content…
For this reason, Keynes sustained the idea of expansionary fiscal policy and tax reduction, in contrast to the mistake the federal policy did, adding taxes and bringing to the ineluctable disasters of Great Depression. The Classical school. We know the economist David Ricardo was one of the main representer of the Classical School, founded on some basic beliefs. The market is able to set it self, the long period will solve problems and a great attention goes to production but without considering the effect of surpluses, when demand decreases. And the austerity of fiscal policy or new higher taxes, didn't help, so the rule also applies for exports and their decrease of demand, particularly in case of high interest rates. Expansionary gap, expansionary fiscal policy and Inflationary gap. On the graph, we get the expansionary gap if we draw the equilibrium and the full employment aggregate, yet their relation gives the recessionary gap. If we increase aggregate production, we fix this gap and for instance, the Government may intervene for this