Question

Critically discuss two different theories of crisis (choose two from: Neoclassical,
New Keynesian, Post-Keynesian and Marxian), linking the theory with its underlying
assumptions. What are the implications for the recommended regulatory response?
Word Limit - 750

Answer 1

The Keynesian model is based on the importance of aggregate demand as a cause of business cycles explains cyclical unemployment increase and fall. The Keynesian model considers changes to aggregate demand to be the cause of business cycle fluctuations. Keynesian model risks missing the long-term causes of economic growth or the natural rate of unemployment at optimal GDP.

The neoclassical model emphasizes aggregate supply with its focus on the determinants of output and employment in markets, and thus tends to put more focus on economic growth and working of the labor markets. However, it is not effective in explaining why unemployment moves up and down over short spans of time. Not convinced with the effectiveness and timeliness of Keynesian policy, neoclassical economists are more likely to advocate a hands-off or limited role for active stabilization policy.

While Keynesians would tend to advocate tradeoff between inflation and unemployment when facing a recession, neoclassical economists argue that no such tradeoff and any short-term gains in lower unemployment will eventually go off and active policy will only lead to inflation.