Question

1. Policy Topic: Assume we are in the depths of the 2009 Recession. What should we do? After the financial crisis began in late 2008, President Bush and then President Obama both introduced heavy stimulus measures to increase output. Using the AS-AD Framework, discuss these measures and all of their effects. How would the Keynesians explain the story? Compare and contrast this to how the classicalists would explain the story. How would both schools suggest the US would get out of a recessionary gap? Use many graphs, math, and discussion. In particular, assume a Classical version of the AS curve; and then separately assume a Keynesian one. Discuss your findings.

Answer 1

The long running debate on the Classical and Keynesian views has entered a new dimension with the advent of economic crisis in th US, 2007-09 and the slow recovery afterwards along with the Euro crisis thereafter led to major changes in macroeconomic policies.

Expansionary policies in terms of really low rate of interest and quantitative easing was suggested by Keynes concept of monetary and fiscal policy. At the same time, Euro crisis was being dealt with policies of austerity or extreme lowering of spending which is comfortable with the classical framework that excessive government spending is not an effective panacea.

Keynesian economists were of the view that stimulative policies In the US had helped to reduce the damages of the recession aftermath. It helped creating employment and suggeste dthat they are subjected to liquidity trap which had limited the impact of expansionary policies as people want to stick to their money in liquid form in bad times. They criticized the classical solutions during the Recession in Europe had led to greater austerity.

While Classical economists believed that government intervention was bad for economic stimulation and it would lead to inflation in the US did not come true.