Question

Discussion 6: Keynesian vs. Neoclassical Economics

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Respond to the following prompts in a post with a minimum of 100 words, then comment on at least ONE other posts.

• 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?
• Next, how would neoclassical economists explain the performance of the economy during the last few years? What has happened to aggregate supply?

Answer 1

a. During the time of recession, the economic growth in the economy had declined. This reduced the growth rate of GDP in the economy. To eliminate the recessionary gap in the economy, government introduced various stimulus packages and Fed also increased the level of money supply which reduced the rate of interest in the economy. This increased the level of investment expenditure in the economy. Thus, according to Keynesian explanation it can be stated government intervention in the economy helped in increasing the level of aggregate demand in the economy and shifted the aggregate demand curve rightwards. Thus, in the last few years, Keynesian economists will explain that increase in aggregate demand has helped in recovery of the economy.

b. The Neoclassical economy is a supply side economy. In the last few years, economy has been on the recovery path and it has been observed that overall output in the economy has increased and growth rate of GDP has also increased post the time if recession in 2008. They will explain the recovery taking place in the economy by the rightward shift of the aggregate supply curve in the economy which has increased production level in the economy and this has helped in increasing the overall level of GDP in the economy and thus National output has also increased in the economy.