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Classical Model and Keynesian Model definitions

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  • Classical Model
    An economic framework assuming flexible prices and wages, full employment, and self-correction without government action.
  • Keynesian Model
    An economic framework emphasizing sticky prices and wages, possible unemployment, and the need for government intervention.
  • Flexible Prices
    A condition where costs of goods and services adjust rapidly to changes in market conditions, restoring equilibrium quickly.
  • Sticky Wages
    A situation where compensation does not adjust quickly to economic shifts, often due to contracts or institutional factors.
  • Full Employment
    A state where all available labor resources are being used efficiently, with anyone seeking work able to find a job.
  • Self-Correction
    A process where market forces alone restore economic stability after disruptions, without outside intervention.
  • Laissez Faire
    An approach advocating minimal government involvement in economic affairs, allowing markets to operate freely.
  • Government Intervention
    Actions by public authorities to influence economic outcomes, especially during recessions or inflation.
  • Aggregate Demand
    The total demand for goods and services within an economy at a given overall price level and time period.
  • Aggregate Supply
    The total output of goods and services that firms in an economy are willing to produce at a given price level.
  • Short Run Equilibrium
    A temporary state where aggregate demand and aggregate supply intersect, possibly away from full employment.
  • Long Run Equilibrium
    A condition where the economy's output matches its potential, with no pressure for prices or output to change.
  • Potential GDP
    The highest level of output an economy can sustain over time without increasing inflation.
  • Invisible Hand
    A metaphor for the self-regulating nature of markets, where individual actions collectively benefit the economy.
  • Recession
    A period of declining economic activity, often marked by reduced output and rising unemployment.