This model is rooted in the ideas of early economists like Adam Smith, David Ricardo, and John Stuart Mill. The classical model emphasizes the concept of free markets where supply and demand are the primary forces driving the economy. It assumes that markets naturally seek a state of equilibrium without government intervention and that all resources are fully utilized.
Developed by John Maynard Keynes during the 1930s, this model suggests that total spending in the economy (aggregate demand) is the primary driving factor of economic growth, especially in times of downturns. Keynesian economics advocates for government intervention to manage demand through fiscal policies like spending and taxes. It is particularly noted for its application during recessive periods to stimulate economic activity.
Monetarism, championed by Milton Friedman, focuses on the role of government in controlling the amount of money in circulation. Monetarists believe that variations in the money supply have major influences on national output in the short run and the price level over longer periods. This model suggests that keeping the money supply steady, targeting low inflation, and controlling interest rates are crucial for maintaining economic stability.
Each of these models offers different perspectives on how economies operate and the best ways to achieve and maintain economic health.