Keynesian economies believe that market frictions cause changes in the equilibrium level. Prices do not change quickly to shifts in demand and supply, and market shocks represent rather big shifts in amounts needed and supplied. Quantities are also quite adjustable, although prices are typically rigid. These economic models also advocate for government intervention in the market to bring about stability (Kurihara, 2001). Neoclassical economics, on the other hand, assume that there are little market frictions and that prices swiftly react to any changes that occur in the market. The quantity of a product demanded and supplied will not change when there are shocks in the market. The quantities are inflexible while the prices are flexible (King and Rebelo, 2000). They do not advocate for any government intervention in the market. Keynesian economies is well applicable in the short run economical phenomena while the neoclassical work well in the long run when the economy works near full employment.
The Keynesian model makes sense in a broad range of the real market situations. The concept of government intervention is profoundly significant in regulating the demand and supply of products in the market. Government intervention is evident from the increase and decrease in the government expenditure along taxes (Mankiw, 2009). The government intervention is essential in encouraging saving and elevation consumption. Additionally, it is fundamental to the businesses particularly when the interest rates are decreased through the regulation to encourage borrowing and thus to impact on the investment level. Personally, the Keynesian theory proved to be significant when the inflation rate had increased, and the necessity products became unaffordable. Through regulating the level of interest rates, and encouraging consumer expenditure, the products decreased in prices.
References
King, R., & Rebelo, S. (2000). Transitional Dynamics and Economic Growth in the Neoclassical Model. Cambridge, Mass.: National Bureau of Economic Research.
Kurihara, K. (2001). The Keynesian theory of economic development. London: Allen and Unwin.
Mankiw, N. G. (2009).Principles of economics. Mason, OH: South-Western Cengage Learning .Educational Series
