What "prescriptions" for an ailing economy might the Keynesians and Classical economists prescribe and how do...

What "prescriptions" for an ailing economy might the Keynesians and Classical economists prescribe and how do their respective policies result in full employment equilibrium?

Expert Solution

Keynesians suggested Fiscal stimulus for ailing economies to revive from the downturn.

Through fiscal stimulus(increased spending or reducing taxes), governments aims at increasing money supply in the market which in turn increases market demand. As the demand rises, more is produced which required additional labour and thus increases the employment levels in the economy.

By assessing the gap between potential GDP and the actual GDP, the government fiscal policies can be devised to ensure potential GDP is attained and the production is on the PPC.

On the other hand Classical economists prescribed increase in government spending incase of ailing economies to revive demand and thus increase the market money supply.

But, it must be noted that Keynes and the classical economists believed that the economy might not be able to attain full employment equilibrium and would rather be in the process of moving towards it always.

Rahul Sunny answered 2 years ago

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