Question

Many governments around the world are fashioning aid packages to try to prop up their economies during the current pandemic. What would be a Classical economic response to a pandemic? What would be a Keynesian economic response to a pandemic? What are some automatic stabilizers that should function in the US during these times? What steps has the Federal Reserve taken to deal with these issues?

Answer 1

Classical economists believed that the output could only be impacted by supply side factors. Classicals would believe that as soon as governments allow the businesses to re open employment would be achieved just like before and output would rise again. All that classicals would ask for would be to compensate the businesses and people for the losses.

Keynesians economic response would include measures to reclaim the earlier aggregate demand. Besides the compensation for the losses suffered, Keynesians would also prefer increased government spending to reclaim the old level of aggregate demand.

Some automatic stabilizers that should function in the US during these times are in fall in corporate and income taxes, personal taxes, etc.

Fed has brought the federal funds interest rate to nearly zero. Moreover, Fed would buy treasury bonds and securities worth at least $700 bn.