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Classical Model and Keynesian Model definitions

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  • Classical Model
    Economic framework assuming flexible prices and wages, full employment, and self-correcting markets without government intervention.
  • Keynesian Model
    Economic theory emphasizing sticky prices and wages, unemployment, and the necessity of government intervention during recessions and inflation.
  • Flexible Prices
    Market condition where prices adjust quickly in response to changes in supply and demand, enabling rapid equilibrium restoration.
  • Sticky Wages
    Situation where wage levels remain unchanged despite shifts in economic conditions, often due to contracts or institutional factors.
  • Full Employment
    State where all available labor resources are being used efficiently, and anyone seeking work can find a job.
  • Self-Correcting Market
    Economic system that naturally returns to equilibrium without external intervention, relying on internal adjustments.
  • Laissez-Faire
    Principle advocating minimal government involvement in economic affairs, allowing markets to operate freely.
  • Government Intervention
    Actions by authorities to influence economic outcomes, such as addressing recessions or inflation through policy measures.
  • Aggregate Demand
    Total spending on goods and services within an economy, represented as a downward-sloping curve in macroeconomic models.
  • Aggregate Supply
    Total output of goods and services produced by an economy, depicted as both short-run and long-run curves in models.
  • Short Run Equilibrium
    Temporary state where aggregate demand and aggregate supply intersect, not necessarily at potential GDP.
  • Long Run Equilibrium
    Condition where aggregate demand, short-run aggregate supply, and long-run aggregate supply meet at potential GDP.
  • Potential GDP
    Maximum sustainable output an economy can produce when all resources are fully employed.
  • Recession
    Period of economic decline marked by reduced aggregate demand, increased unemployment, and lower output.
  • Invisible Hand
    Metaphor for the self-regulating nature of markets, guiding resources to their most efficient uses without direct intervention.