a) State, compare and contrast policy suggestions by the Keynesian School and th
ID: 1188829 • Letter: A
Question
a) State, compare and contrast policy suggestions by the Keynesian School and the Monetarist School to reduce problem of macroeconomic instability and unemployment in a market capitalist economy.
b) For each of these schools, provide and discuss one specific example (including the time period) from the U.S. economic history in which the theories were adopted as government policies and helped reduce instability in the economy. Be specific about your example, explain the policy that was implemented using tools of monetary and fiscal policy that we cover in class.
Explanation / Answer
a) Keynes suggested the government should keep investing in the recessionary conditions to maintain the aggregate demand. In other words, he supported budget deficit during economic slowdown as both individuals and corporates keen to save or repay their debt obligations , that results in lower demand in the economy. So its for the government to borrow those extra savings from the market and spend in the economy to maintain the aggregate demand. He was majorly supportive of the fiscal policy actions as monetary policy might not serve the purpose because keeping interest rates at record low or zero might not result in higher demand as people generally avoild to borrow and invest.
on the other side, monetarists school said government should not keep investing in the economy through budget deficit as it has long nergative effects. They advocated for loose monetary policy by keeing interest rates low or zero.
b) Take an example of the great depression of 1930, at that time the central bank reduced the interest rates to zero that was a major monetary policy step. It was exepcted that the demand will pick up for loans and investments will be made into economy. But it didnt happen as people and firms were fearful, so they didnt borrow and economy continue to go deep into the red which resulted in depression. After some time, it realized that to get the economy out of depression , aggregate demand should be maintained , for that it is neccssary to bring savings into the investments which can be done only by government through infrastructure spending. These fiscal policy steps resulted in improvment in the economy. To borrow the government had issued the bonds , also cut taxes and invested in the economy. these were the fiscal tools.
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