Question

What will classical economists recommend with respect to fiscal and monetary policies as stabilization tools? What was the reasoning behind thell recommendations ? Use theoretical reasoning and diagrammatio representation liberally to support your answers .

Answer 1

Classical Economists recommend use of neither fiscal nor monetary policy by government. Classical economics highlight the fact that free trade market lead to an effecient results and self control. In the long run aggregate supply curve is inelastic according to classical economics. Classical economists give little importance on the use of fiscal policy to manage aggregate demand. The Classical economics is base for monetarism which only focuses on managing the money supply through monetary policy.

The Classical model emphasize the importance of limiting government intervention in market to keep it free of possible barriers to thier systematic operation. Classical economist believed in free market, economy would always attain full employment by forces of demand and supply. Accccording to Classical economists monetary policy only have the impact on prices, its not impact the the factor of output and employment and fiscal policy was view to be harmful. Therefore there is no need of goverment intervention as market forces lead to full employment equilibrium in economy.

The reasons behind the recommendation of Classical model is that economy is always capable of demanding all output that is workers and firm choose to the output that firm select to produce. The market price mechanism play as strong invisible hands to allocate resoucres.