There are two mainstream schools of thought in Macroeconomics: the Keynesian school and the Neoclassical school. They are also known as "demand- side" and "supply-side" economics, respectively. Describe the main features of the Keynesian school, and explain how it differs from the Neoclassical school. What do Keynesians believe that the government should do to help the economy?

Answer:

• Keynesian economics is a macroeconomic economic theory of total spending in the economy and its effects on output, employment, and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynesian economics is considered a "demand-side" theory that focuses on changes in the economy over the short run. Keynes’s theory was the first to sharply separate the study of economic behavior and markets based on individual incentives from the study of broad national economic aggregate variables and constructs.

Keynes recognized that the events of the Great Depression contradicted Say’s law, which states that supply creates its own demand. Although production capacity existed, the markets were not able to sell their products. As a result, real GDP was less than potential GDP.
Keynesian economics is based on two main ideas. First, aggregate demand is more likely than aggregate supply to be the primary cause of a short-run economic event like a recession. Second, wages and prices can be sticky, and so, in an economic downturn, unemployment can result.
The coordination argument states that downward wage and price flexibility requires perfect information about the level of lower compensation acceptable to other labourers and market participants.

• According to neoclassical economics, the central economic problem is the limited nature of social resources. Due to this scarcity, economics as science should study the organization of an economy in order to establish welfare by the optimal allocation of resources. Simply put, the economy can be understood as an exchange economy in which rational actors with exogenously determined resource allocations interact in markets. Those actors trade with each other since the interaction generates mutual utility. Productivity is seen as the source for the functioning of the economy and the determinant of the wealth of a nation.The term neoclassical economics was coined in 1900.

Neoclassical economists believe that a consumer's first concern is to maximize personal satisfaction. Therefore, they make purchasing decisions based on their evaluations of the utility of a product or service. This theory coincides with rational behavior theory, which states that people act rationally when making economic decisions.
Further, neoclassical economics stipulates that a product or service often has value above and beyond its production costs. While classical economic theory assumes that a product's value derives from the cost of materials plus the cost of labor, neoclassical economists say that consumer perceptions of the value of a product affect its price and demand.
Finally, this economic theory states that competition leads to an efficient allocation of resources within an economy. The forces of supply and demand create market equilibrium.
In contrast to Keynesian economics, the neoclassical school states that savings determine investment. It concludes that equilibrium in the market and growth at full employment should be the primary economic priorities of government.

Keynesian Beleif on Government:If the other components of aggregate demand are static, government spending can mitigate these issues. If people are less able or willing to consume, and businesses are less willing to invest in building more factories, the government can step in to increase government spending to generate demand for goods and services. Keynesian economics supports heavy government spending during a national recession to encourage economic activity. Putting more money in the pockets of the middle and lower classes has a greater benefit to the economy than saving or stockpiling the money in a wealthy person's account.