Question

Explain the difference deemed appropriate for government intervention in addressing the state of the economy between Keynesian and Classical theorists. Do they have a sharply different perspective on the role of the government and if so what are the positions of each group regarding using government intervention to affect the state of the economy.

Were the actions taken thus far by the federal government to address the dire impact of Covid19 on the state of the economy more Keynesian or Classical in principle? What is your personal opinion as to the actions that have been, and will be, taken by the federal government to address the state of the economy?

Answer 1

The two schools of thought-Keynesian and Classical have different positions on role of government addressing recessionary or inflationary gap in the economy. Classical believed in self adjustment mechanism of the economy and thus do not believe in government intervention to correct recession or boom in the economy. They believed that wages and prices are flexible which will move the economy to its full employment level without any government intervention. Thus, Classical believed in laissez faire theory with no government intervention.

On the other hand, Keynesian believed that wages and prices are sticky in the economy and thus the economy will not adjust automatically to its full employment level and this requires government intervention in the form of expansionary fiscal policy when economy is in recession and contractionary fiscal policy when economy is on boom. These adjustments will move the economy to its full employment level. Thus, Keynesian believed in government intervention in the economy.

In response to the Covid-19 situation, government has been announcing various fiscal stimulus packages in the economy to reduce the impact of recessionary gap in the economy. Thus, the response has been more Keynesian. To correct the state of the economy government is injecting liquidity in the economy and should do this in future to prevent recession in the economy to persist.