Macroeconomics
Table 5: Mainstream vs. Classical Economists’ Views on Dealing with a Recession
Mainstream Economists' Response
Classical Economists' Response
Do
Nothing
(Laissez-Faire):
Classical
Easy Money Policy: Mainstream economists typically advocate for an easy monetary policy during a recession. This involves measures like lowering interest rates and increasing the money supply to encourage borrowing and spending by consumers and businesses.
economists, the principles of laissez-faire economics, argue that government intervention is unnecessary during a recession. They believe that markets have self-correcting mechanisms. In this context, they argue that the reduction in wages and resource prices, which often occurs during a recession due to high unemployment,willeventuallyleadtoarightward shift of the SRAS curve. classical economics,theself-correctionprocesswillrestore the economy to its full-employment output level. As wages and resource prices decrease, businesses become more competitive, leading to increased productionandemployment.Whilethis process may taketime,classicaleconomiststrust that market forces will naturally lead to recovery. following Self-correction: According to
ExpansionaryFiscalPolicy: Anotherapproachis expansionary fscal policy. Governments can increase publicspending,cuttaxes,orimplement a combination of both to stimulate demand. The aim is toshifttheaggregatedemandcurvetothe right, whichcanhelpreviveeconomicgrowthand reduce unemployment.
Keynesian Economics Keynesian economists, influenced by the ideas of John Maynard Keynes, believe that government intervention in the economy is necessary , especially during economic downturns. They argue that markets can sometimes fail to self-correct, leading to prolonged periods of unemployment and economic hardship. Keynesian economics promotes the use of fscal policy (government spending and taxation) and monetary policy (centralbankactions)tostabilizetheeconomy. Theyemphasizetheimportanceof aggregate demand in influencing economic output and employment. Keynesian economics gained prominence during the Great Depression of the 1930s. It has been influential in shaping economic policy, particularly during times of economic crisis. Rational Expectations Rational expectationstheoristsbelievethatindividualsandfrmsmakeeconomicdecisionsbased ontheirrationalassessmentoffutureeconomicconditions. Theyassumethatpeoplehaveaccessto all available information and make decisions that align with their best interests.
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