Question

1. Discuss the Keynesian versus classical business cycle. Discuss the implications with regards to government intervention in the economy. What are the political implications?

Answer 1

Keynesian v/s Classical business cycle
Classical economic thoughts believe in the free market system where the fiscal policies are meant to be less effective in the economy. They believe the monetary policies and the market itself work on various factors leading the economy towards full employment through self regulation. Classical economists believe that, deviations from full employment are temporary and will be rectified since the long run aggregate supply curve is inelastic. Limiting the government from interventions makes the economy to perform freely and operate efficiently reducing the barriers in the market. The market will automatically adjust to the boom and the recession in the economic activities.
Keynes suggests the importance of government interventions as fiscal policies to encourage the market and help it to perform well at any situation. Efficient fiscal policies at the time of recession and also at inflation could help the economy to change its way of functioning and to make it stable. The period of recession demands more the need of fiscal policies which could increase public spending and thus encouraging the production and economic growth. The imperfect markets make the economy below than it full capacity especially in the long run. The business cycles have huge impact on aggregate demand which fiscal policies could improve especially in the time of recession. Also, Keynes put forward the idea of demand deficient unemployment which is affected the level of demand of commodities over that of classical which suggests for supply side factors of unemployment.
Political implications impact much in fiscal reforms and the way government responds to the economic situations. A government policy can be ineffective to carry out the functions that a fiscal policy could do at various situations and leads to further economic failure. Political views and ideologies can affect the economy in the aspect of Keynesian theory and it will not be much effective in the classical because of its less effect in the system.