Explain how the classical school of thought would react/respond to the following

Question

Explain how the classical school of thought would react/respond to the following situation:

The economy has experienced a sudden collapse of asset prices, with the stock, real estate, and commodity market experiencing declines of over 50 percent relative to last year. Data show a loss of nearly 1 million jobs since last month, which brings to year-to-date loss of jobs to nearly 5 million. And, bank lending has slowed sharply, and initial data on investment suggests a sharp decline in new projects. The central bank reports that that bank balance sheets have deteriorated significantly, and it is contemplating emergency monetary actions. The country's Prime Minister claims to be "on top of the situation," but polls suggest her popularity is falling fast as confidence in the government's economic leadership diminishes. This appears to be the start of a serious recession, with the rate of decline in production rivaling the rapid declines in 2008 and 2009.

Describe clearly, or use diagrams, or other specified models to describe how they would handle the situation.

Explanation / Answer

The classical will argue that crisis is temporary phenomena. General glut can't remain for long. Supply will create it's own demand They will prescribe non interventionist policy. According to this policy govt should not intervene. AS PER SAYS LAW They tare led to believe that supply will create it's own demand. Furthermore some modern day classical Economists would argue govt intervention is harmful to supply side. It may prevent invisible hand to operate and recovery will take time.. New regulations on financial sector, higher taxes on rich, increased govt role in medical sector etc are such policies. Thee modern day classical also think recession was created by rush to liquidity after failure of lemon brothers. But as said earlier they expect economy to heal on its own.

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