Question

Principles of Macroeconomics

Discussion: Keynesian vs. Neoclassical Economics
Please respond with a minimum of 100 words

Thinking back to the business cycle discussion, how would Keynesian economists explain the performance of the economy during the last few years? What has happened to aggregate demand? What evidence can you present to support this position?
Next, how would neoclassical economists explain the performance of the economy during the last few years? What has happened to aggregate supply? What evidence can you present to support this position?
Evaluate the evidence and decide which interpretation makes the most sense to you.

Answer 1

Keynesian economists rely on strong government intervention to stimulate the economy and this what they have observed in the world economy and specifically in the US economy in the last few years. In US economy, the aggregate demand is stimulated by the government coming up with the package of over $787 Billion and Fed also implemented expansionary monetary policy since 2008. It helped the AD to increase and US economy has recovered from the consequences of the financial crisis of 2008. So, there is a clear evidence of government using a big stimulus package, running a relief program for the troubled assets and other benefits to stimulate the demand and help the economy to recover and grow.

In contrast to it, neoclassical economists relied on a principle that government should not intervene to achieve the market efficiency. In the last few years, such cases are not observed that supply has improved without the help of government intervention. It is the government stimulus in the form of tax rebate and healthy demand conditions in the economy that has cause supply to increase and cater.

Hence, in these two approaches. Keynesian approach is more applied as government intervention is deemed necessary to help the economy recover. It is clearly evident from the policies applied in the US economy and its results. Though, it took time for the policy to show the impact, but it was due to lag effect. Hence, Keynesian approach makes more sense in the present days scenario.