Why do classical economists and Keynesian economists agree o

Why do classical economists and Keynesian economists agree on the long-run effects of a fall in aggregate demand but not on the short-run effects?

Solution

The Basic reason that the classical economists and Keynesian economists agree on the long-run effects of a fall in aggregate demand but not on the short-run effects is as follows:-

1. Classical Economists:- According to Classical school, A free economy (without any intervention by the government) always achieves equilibrium with fuller utilisation of resources. Unemployment, if it occurs, will disappear automatically. Thus they believe that free economy is the best economy as it offers maximum employment, highest level of income and automatically reaches the state of equilibrium in long run.

2. Keynesian Economists:- According to Keynesian school, Unemployment will not disappear automatically. The government must intervene. It should undertake investment and production to generate employment opportunities.

Therefore, due to basic difference in the themes of these two category of economists, they do not agree on the short-run effects of a fall in aggregate demand. However they will definitely agree on the long-run effects of a fall in aggregate demand.