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History and Background
Before the introduction of Keynesian economics and Milton Friedman’s Monetarism theory, there was classical economics. These economists believed in self-adjusting market mechanisms, however with that the market needs perfect competition. Wages and prices in the market must be flexible. These economists believe that supply and demand pulls would always help the economy reach full employment.
Full employment could be achieved by the market forces and with that changes the level of employment resulting in a fixed income and aggregate output. They believed that fixed income was a result of full employment and the price level was established by the supply of money in the economy. Since classical economist believed that it was the market that leads to full employment in the economy, they thought the market could do without any government intervention.
Government spending and taxes cause overall harm to economy because it would decrease individual spending and private consumption. Raising taxes on private consumption would only help fund public consumption a…