Question

debate between the Classical (Hayek) and Keynesian economist. Please answer the following questions in your paper:

1. Summarize the differences including which is more supply (production) oriented and which is demand (consumption) oriented.
2. Which does the US seem to favor?
3. Given what you’ve learned thus far about how both fiscal (T and G) and monetary (Investment via interest rates) policies work on the macro economy, what do you foresee happening from here?

Answer 1

Classical economics proposes no role of the government in managing the economy, whereas Keynesian economics favors strong government intervention. Here, classical economics wants automatic stabilizers to get operated in the economy that will reestablish in the economy at long run equilibrium, but Keynesian economics proposes to bring discretionary fiscal policy regarding the spending and or taxation to help the economy achieve long run equilibrium. So, classical economics is more of supply side economics and wants aggregate supply to shift and achieve the long run equilibrium. In contrast to it, Keynesian approach proposes to stimulate the demand, because it is the demand that creates supply. In support of the argument, Keynesian approach gives an example of the great depression of 1930s that was the result of classical approach.

During the economic crisis of 2008 and subsequent recession, the US authorities adopted expansionary fiscal and monetary policies that were meant for the stimulation of the demand, while helping firms as well. So, it can be said that US seems to favor Keynesian approach and brought strong government intervention.

It can be foreseen that there will government applying active fiscal policy and Federal Reserve applying active monetary policies to regulate the economy. It has been observed in the recent past that lack of deregulation and laissez Faire approach, promotes moral hazard and market failure problem takes place. Hence, these policies (fiscal and monetary) will work and complement each other. Here, Fed will increase the FFR and fix the inflation rate target by increasing the rates and government will contain from the exaggerated expansionary fiscal policy.