Question

Discuss an example of a policy using the Neoclassical perspective on Macroeconomics in a specific country. What are the impacts of the policy on the economy over the long run?

Answer 1

Neoclassical economic theories refer to the oldest and the base economic theories which were postulated by the founding greats of economics and its implications. There were a number of neo-classical economists and their theories. Let us discuss the Keynesian model of macroeconomics which was implemented in many countries and primarily in the United States.

If the aggregate demand in an economy goes down considerably which shoots up the unemployment level in the economy , then according to the Keynes , it is the State policy or the Government policy that should gap the brige between the supply required in the market and the demand which is coming from the market. Keynes in his theories put a lot of importance on the State or the Government and its role in the essential up bringing of the economy of the State. According to Keynes, the Government should find out as to why the demand for the economic factors and the aggregate demand and fallen so drastically in the economy. Once the issue behind the sharp decline in the aggregate demand is identified, the Government should bring about the effective measures to curb the imbalances that are causing the demand fall by inducing changes in the tax system and their spending in the market. Keynes had put a lot of stress on the timely actions needed by the Government for a proper functioning of the state and its economy.

The Keynesian model of economic development is considered as the pillar of the setting up of the modern economic theories which are followed in the current economy. When the Keynesian model is implemented in an economy, the base of the economy becomes stronger in the terms of economic stability and the balance of payments get stabilized. The demand and supply factors are the most critical factors that rule the economic stability of an economy.Keynes in his model, has stressed that the Government should keep the factors of demand should be kept under control.The factors of demand such as the economic desires , economic sustainability, and economic well being of the people decide the economic condition of the people and the economic condition of the people decide the demand in the economy. In the longer run, Keynesian model makes the economy more stable and risk free.