Question

1. How are the Keynesian and neoclassical perspectives on the economy different, and how is it possible for one economist to accept both of these perspectives?
2. Explain why there is an expenditure multiplier and why it is expected to be different for government spending and taxation.

Answer 1

Part A

The Keynesian build their model based on the importance of aggregate demand. Which is the main cause of business cycles, price rigidity and also the wages. Moreover, they give importance to cyclical unemployment. For adjusting the short run macroeconomic equilibrium, looks forward to the long run equilibrium in the economy. That is, long-run economic growth and the natural rate of unemployment always exist when the economy is producing at the potential level of output.

In the neoclassical synthesis, based on the principle of aggregate supply is the major determinant of output and employment in the economy. It helps to understand the long run recession of the economy. Neoclassical paid the importance of cost would create a recession in the economy.

Both models are a good fit at the time horizon. The Keynesian is applicable in the short-run changes in the economy and neoclassical applicable in the long run.

Part B

The expenditure multiplier is the measure of aggregate production changes due to the autonomous expenditure. Government spending is discussed with the government spending multiplier. That is an increase in spending due to the rise in income and expenditure. Similarly, tax multiplier is the change in tax due to the change in aggregate demand.