Question

Compare and contrast the policy prescriptions in response to the current recession that would be provided by classical economists, Keynesian economists, monetarist economists, and new classical (DSGE) economists. Be sure to discuss the basis (i.e., the underlying assumptions) for these policy prescriptions within each theory and why they would propose the policies.

Answer 1

sol: the gneral theory of employment, interest and money can be used during the current recession condition due to COVID-19. This theory of J.M Keynes also helps during the recession of USA.

In 1936 this theory is given by J.M keynes in his last book. this thwory is based on two fudamental postulates:

1) The wage is equal to the marginal product of labor.

this means that wage of an unemployed people is equal to the marginal productivity of labor.

2 )  the utility of the wage when a given volume of labor is employed is equal to its marginal disutility.  

According to keynes," if there is an unemployment in the market than labor will be willing to work at lower prices or wage rate. it will lead to downward pressure on wages and will offer more jobs.

this theory works on the concept that effective demand is equal to the output as well as income.

Main points of J.M keynes theory:

i) Aggregate demand is more effective than aggregate supply.Can help in the short run of recession time period.

ii) Focus should be wages and prices otherwise it will lead to unemployment.