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Classical v. Keynesian Approaches to Smoothing Business Cycles

Fiscal policies are the actions of Congress on spending and taxing. (Note this is different from monetary policy, which is the action taken by the Federal Reserve to change the money supply and interest rates.)
Explain and compare the Keynesian and classical points of view on whether or not to intervene during the business cycle (an expansion = positive real GDP growth; and a recession = negative real GDP growth).
Are we in recession today? Use today’s real GDP growth rates to explain your answer.
As the President’s chief economist, describe the Keynesian fiscal policy you think the administration should follow, given today’s economic conditions. Support your point of view using principles of Keynesian economics, as described by Mayer in Chapter 16 of Everything Economics.
What Role for Government? In Chapter 3, Wheelan describes a number of ways in which the “government is your friend” in a well-functioning society and economy. List and explain two ways that, in your everyday lives, there is a need for an effective government role in an economy.

Sample Answer

Fiscal policies are the actions of Congress on spending and taxing. They are used to influence the economy in a variety of ways, such as stimulating economic growth, reducing unemployment, and controlling inflation.

Keynesian economics is a school of thought that argues that the government should intervene in the economy during the business cycle to stabilize it. Keynesians believe that the economy is inherently unstable and that it can easily fall into recession. They argue that the government can use fiscal policy to increase aggregate demand and stimulate economic growth.

Classical economics is a school of thought that argues that the economy is self-correcting and that the government should not intervene in it. Classical economists believe that the economy will eventually return to equilibrium on its own, without government intervention. They argue that government intervention can actually make the economy worse by creating distortions.

Full Answer Section

The main difference between Keynesian and classical economics is their view of the role of government in the economy. Keynesians believe that the government should intervene in the economy to stabilize it, while classical economists believe that the government should not intervene in the economy.

Are we in recession today?

The United States is not currently in a recession. The real GDP growth rate for the third quarter of 2022 was 2.3%, which is above the 2% growth rate that is generally considered to be the threshold for a recession. However, the real GDP growth rate for the fourth quarter of 2022 is expected to be lower, due to a number of factors, including the Federal Reserve’s interest rate hikes and the ongoing war in Ukraine. If the real GDP growth rate for the fourth quarter of 2022 is below 2%, the United States may be considered to be in a recession.

As the President’s chief economist, describe the Keynesian fiscal policy you think the administration should follow, given today’s economic conditions.

If I were the President’s chief economist, I would recommend that the administration follow a Keynesian fiscal policy to stimulate economic growth. This would involve increasing government spending on infrastructure projects and other programs that would create jobs. It would also involve reducing taxes for businesses and individuals, which would put more money into the economy.

I believe that this Keynesian fiscal policy would be effective in stimulating economic growth and reducing unemployment. It would also help to create a more fair and equitable economy.

What Role for Government?

Wheelan argues in Chapter 3 of Everything Economics that the government plays a number of important roles in a well-functioning society and economy. These roles include:

Providing public goods, such as national defense, education, and infrastructure.
Regulating the economy to prevent monopolies and unfair business practices.
Distributing income more evenly to reduce poverty and inequality.
Stabilizing the economy during recessions.

I agree with Wheelan that the government plays an important role in a well-functioning society and economy. I believe that the government is necessary to provide public goods, regulate the economy, distribute income more evenly, and stabilize the economy during recessions.

Here are two ways that, in my everyday lives, there is a need for an effective government role in an economy:

The government provides me with public goods, such as national defense and education. I benefit from these public goods every day, even though I don’t pay for them directly.
The government regulates the economy to prevent monopolies and unfair business practices. This helps to ensure that I have a fair chance to compete in the marketplace.

I believe that these are just two examples of the many ways that the government plays an important role in my everyday life. I am grateful for the effective government role in the economy and I believe that it is essential for a well-functioning society.

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Classical v. Keynesian Approaches to Smoothing Business Cycles

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