Question

1. How are the Keynesian and neoclassical perspectives on the economy different, and how is it possible for one economist to accept both of these perspectives?

2. Explain why there is an expenditure multiplier and why it is expected to be different for government spending and taxation.

Answer 1

1.
Keynesian and Neoclassical perspectives are different, as they take different approaches to resurrect and stabilize the economy. Here, the Keynesian perspective relies upon strong government intervention so stimulate the demand and push it to achieve full employment economy, whereas neoclassical perspective relies upon automatic stabilizers with economy’s self-correcting features and wants no intervention from the government. Hence, these perspectives differ upon the role of the government and policies that can bring back the economy at long run equilibrium. An economist can accept both the perspectives together, if role of the government is to act as a moderator with proactive regulations that set policies upon that market works. Here, the government does not intervene in day to day operations and automatic stabilizers such as transfer payments are already in place. So, government intervenes, but only to maintain free, fair and healthy competition in the economy and other policies work to help economy recover from the recession.

2.
There is an expenditure multiplier, because spending has multiplier effects. Here, consumption of one person, becomes the income of another person and expenditure keeps increasing. It increases the demand to the manifold as per the expenditure multiplier. The multiplier for government spending and taxation are different, because government spending directly increases the consumption, but taxation first affects the disposable income and then it is spent on the basis of marginal propensity to consume. It is the reason that tax multiplier is lower than the spending multiplier.