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Economic Schools of Thought

1. If the economy experiences a recessionary gap, how does the new classical approach to macroeconomic policy (to eliminate the gap) differ from the Keynesian approach? Compare and contrast the classical and Keynesian views of aggregate demand and aggregate supply.

2. Explain one real-world event that supports the Classical theory and Keynesian theory (two separate events for each theory).

3. Do you think there are certain economic crises that require government intervention (i.e Great Depression, Auto Industry failure, etc.)? Why or why not?

4. In dealing with the recession of 2008, why is it important for the Fed and Congress to coordinate monetary and fiscal policy measures?

Bernanke, Ben S. (2009) "The Crisis and the Policy Response" (speech, London School of Economics, January 13, 2009).

Uchitelle, Louis. (2009) "Economists Warm to Government Spending but Debate Its Form," New York Times, January 7, 2009, p. B1.

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Economic school of thought
1. The classical economist believes that the economy self regulates and the government should not intervene to attempt to correct the economy because the government would only make things worse. The only way to encourage growth is to allow for free trade and free markets. The government's main role is to ensure the free workings of the markets through supply side policies and to ensure a balanced budget. There are three main theories used to justify the classical view:
(1.) Free market theory is expressed by the classical economist that if the economy is left to itself, then the economy would tend to show full employment equilibrium. (2.) According to Say's law, any increase in the output of goods and services (supply) leads to an increase in expenditure to buy those goods and services (demand). In other words, supply creates its own demand. (3.) Based on the Quantity theory of money, classical economist view of inflation is derived from the Fisher Equation of Exchange: MV = PY Where: M is the amount of money in circulation, V is the velocity of circulation of that money, P is the average price level and Y is the real GDP. According to classical ...

Solution Summary

The following posting helps with problems involving economic schools of thought. Concepts covered include aggregate demand, aggregate supply, government intervention and policy measures.