Question

• Since the outbreak of COVID-19 the US is going through one of the biggest recession of all time. How would Keynesian economists explain the current economic recession? Feel free to use graphs, news report to explain your reasoning.
• How would Neoclassical economists explain the the current economic recession? Feel free to use graphs, news report to explain your reasoning.
• Which interpretation makes the most sense to you? Why?

Answer 1

Keynesian economists would explain the current economic recession as being caused due to slowdown in aggregate demand, as Covid-19 has caused decline in income generation and higher unemployment rates. This has led to slowdown in aggregate demand and that the focus should be short term wherein there is sufficient stimulus given in order to increase aggregate demand by eliminating cyclical unemployment rates. As seen from the news articles the unemployment rate has increased drastically and the level of economic output is also expected to contract as per the IMF.

In the case of neoclassical economists, economic output is impacted because of decline in aggregate supply. Thus in the current scenario, there is decline in economic output because the aggregate supply has reduced according to these economists. The focus should be long term wherein in order to address high rates of unemployment, the labor market should be reformed so that natural rate of unemployment is reduced. According to them recession is caused due to decline in aggregate supply and increase in aggregate demand is only the short run solution, which might lead to increase in inflation.

With respect to current economic recession, Keynesian interpretation makes most sense as there has been a fall in aggregate demand because consumers are turning more cautious leading to decline in the level of economic output. Decline in aggregate demand causes decline in aggregate supply.