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Keynesian Solutions

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1. What is the Keynesian solution to a recession or depression? How does the Keynesian multiplier work?
2. We are slowly coming out of a recession now. What kind of policies were/are proposed to help get us out of this recession? Do these sound like Keynesian polices or Classical ones? Why?

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The Keynesian solution to a recession or depression is that the government should use the monetary and fiscal policy to correct disequilibrium and improve the efficiency of the economy. The government should stimulate the demand because in the short run the aggregate supply curve is upward sloping and so an increase in aggregate demand will lead to an increase in production.

Keynesian multiplier works in this manner. When the government purchases increase by $1, because Y = C + I + C + NX this will increase the income by $1. This is the direct effect. When the income increases ...

Solution Summary

The response provides you a structured explanation of fiscal policy during economic depression . It also gives you the relevant references.

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Week 2: Discussion Questions

1. Explain the different viewpoints of Classical and Keynesian economists. How did the economy that existed at the time these theories were developed influence these theories? Which theory seems to be more appropriate for the economy today?

2. Why do Keynesian economists believe that market forces do not automatically adjust for unemployment and inflation? What is their solution for the stabilization of economic fluctuations? Why do they believe changes in government spending impact the economy differently than changes in income taxes?

3. What is the difference between contractionary and expansionary fiscal policy? Which do you think is more appropriate today? Explain your answer. How might contractionary and expansionary fiscal policy affect your organization?

4. Have you experienced an economic recession? How did it affect hiring practices at your place of employment?

5. How do Classical and Keynesian economists differ in their solutions for inflation and unemployment problems?

6. Inflation, on average, makes people neither richer nor poorer. Therefore it has no cost. True or false? Explain.

7. What roles do specialization and division of labor play in economists' support of free trade?

8. If the economy were close to high potential output, would policymakers present their policy prescriptions to increase real output any differently than if the economy were far from potential output? Why?

9. What is the current state of U.S. fiscal policy? Would you advise the United States to change its fiscal policy? Why?

10. Why does cutting taxes by $100 have a smaller effect on GDP than increasing expenditures by $100?

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