Question

There is a long-running debate between the Classical School and Keynes regarding the ability of the economy to regain full-employment GDP after a recessionary gap (S>I) has emerged. This is known as the Keynes vs. Classics debate. First, explain why the Classical School believes that the economy will automatically fix this situation, i.e., how/why exactly does it believes full-employment GDP will be restored relatively quickly. Your response should be detailed and focus on 3 particular "prices" in the economy. (Hint: remember the Classicals' three-legged stool.) Second, explain why/how Keynes attempts to refute the Classical's auto-correction story. Then, explain Keynes' multiplier concept in the context of a recession, i.e., how did Keynes theorize a recessionary would unfold and why did he believe it could often persist. Be specific and concise. And, make sure you indicate how Keynes thought about the origins of a recession and the role expectations play in this process. Finally, explain each school of thought's respective policy conclusions, i.e., how does each school propose to "fix" a recession?

Answer 1