Question

1. Explain whether current economic conditions are more consistent with the Keynesian or classical economic theories.
2. Give a brief summary the impact of the macro-environment in the economy.

Answer 1

The current economic conditions are more consistent with Keynesian economic theories, because it is the government that has strongly intervened in the economy to stimulate it. It is not only the case in the USA, but also it has been done in different countries across the world. It is observed by the government coming up with stimulus packages such as increased level of government spending and or decrease the tax rate to help economy sustain and survive the recent crisis due to the pandemic of COVID-19.

In contrast to it, classical economic theory demands no or least involvement of the government, but it is not the case in present economic scenario. So, classical economic theory is not appropriate in the present economic scenario.

With the adaption of Keynesian approach, government has increased spending, transferred direct cash into the account of people and given subsidies to firms. It has caused stimulate the aggregate demand in the economy. As a result, firms increase supply and create new jobs. so, economy has macro-environment that gets lower unemployment rate and higher real output. Though it also increases the price level in the economy. It is as per the Keynesian approach to help the economy recover from the slowdown.