Question

Explain what both a Classical and a Keynesian economist would do in the following scenarios:

a) Macroeconomic outcome is undesirable (unemployment or inflation is too high). What would each do to resolve this?

b) Tax cut is needed to stimulate the economy. What type would each economist suggest?

Answer 1

Ans

1 classicals will argue that economy through wage price flexibility will itself correct problem. Keynesians would argue for higher Govt expenditure to reduce unemployment or lower government expenditure to reduce inflation

2 keynesian would argue to reduce taxes on income to stimulate consumption and thus Aggregate demand. Classicals believing in says law will argue for least Govt intervention in economy and thus will argue for reduction of all taxes particularly on producers