Question

Write a brief description about how each economic school of thought (Classical, Keynesian, Monetarist and Supply-Sider) believes the government should use policy tools (fiscal, monetary and supply-side) to fix the economy. This section should be 1-2 paragraphs for each school of thought. Based on what you have learned this semester, who do you think is closest to being right about how to fix the economy? Classical economists, Keynesians, Monetarists or Supply-Siders? Why? Does it depend on the cause of the macroeconomic disruption? Which school of thought would be best during a recession? Why? Which school of thought would be best during a period of inflation? Why? Which school of thought would be best during a period of stagflation? Why? Be sure that you reference specific periods of time when your school of thought was successful. This needs to be based on facts.

Answer 1

Answer:

Consider the following explanation.

Explanation:

Classical believed in the policy of laissez faire or no government intervention. This is because they believed markets are self adjusting and Supply will create its own demand. Thus, they believed in free markets and no intervention by the government.

Keynesian believed in government intervention because markets are not self adjusting as depicted in the Great Depression of 1930s. Thus, government intervention is needed to move the economy out of recession. They believed that fiscal policy is more effective in moving the economy out of recession as compared to monetary policy due to liquidity preference theory.

Monetarist believed in using monetary policy tools as they considered monetary policy more effective as compared to fiscal policy. Thus, Central Bank should intervene by increasing or decreasing money supply to prevent fluctuations in the economy.

Supply side economics emphasizes on free market policies but some supply side policies might involve government intervention to overcome market failure.

Keynesian economists are generally close to fixing the fluctuations in the market economy.The 1930s depression could be controlled because of Keynesian policies. In some cases, cause also plays an important role. For instance, the great recession of 2008 could be controlled by increasing money supply and reducing the level of interest rates in the economy.

During recession, Keynesian school of thought is best. This is because expansionary government policies are needed to move the economy out of recession. During inflation , money supply changes will play an important role and thus monetarist school of thought is best.During the time of stagflation, supply side economics is the most important as only increase in aggregate supply can control the level of inflation in the economy.