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The main points of contrast between the classical and Keynesian theories of income and employment are discussed in brief as under:
(1) Unemployment:
The classical economists explained unemployment using traditional partial equilibrium supply and demand analysis. According to them: "Unemployment results when there is an excess supply of labor at a particular higher wage level. By accepting lower wages, the unemployed workers will go back to their jobs and the equilibrium between demand for labor and supply of labor will be established in the labor market in the long period. This equilibrium in the economy is always associated with full employment level. According to the classical economists, unemployment results when the wage level of the workers is above the equilibrium wage level and as a result, thereof, the quantity of labor supplied is higher than quantity of labor demanded. The difference between the two (supply and demand) is unemployment. J. M. Keynes and his followers, however, reject the fundamental classical theory of full employment equilibrium in the economy. They consider it as unrealistic. According them: "Full employment is a rare phenomenon in the capitalistic economy. The unemployment occurs, they say, when the aggregate demand function intersects the aggregate supply function at a point of less than full employment level. Keynes suggested that in the short period, the government can raise aggregate demand in the economy through public investment programmes to reduce unemployment".
J. M. Keynes has rejected the simple quantity theory of money. According to him, if there is recession in the economy, and the resources are lying idle and unutilized, an increased spending of money may lead to substantial increase in real output and employment without affecting the price level.