a) Keynesian Economists View
According to the Keynesian economist, macroeconomic recessions can be prolonged. They support intervention by the government through monetary and fiscal policies. These policies aim at stimulating the economy that has depressed. At the same time, monetary and fiscal intervention creates product demand that will lead to achievement regarding economic growth levels and eventually full employment.
Keynesian economists also put a lot of emphasis on consumers demand because it acts as the main driving force in the economy. Demand can create its supply because when it will lead to a rise in prices and therefore motivating the producers and suppliers to supply more and earn more profits. Therefore, the Keynesian idea supports the expansionary fiscal policies. These policies contribute when it comes to refilling recessionary gap for the depressed economy. Therefore, expansionary policies involve high government spending on projects like infrastructural development because such projects create employment opportunities ejects funds into the economy. Both middle class and lower class people can access fund from the jobs opportunities created by such projects.
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Various politicians in most cases rely on expansionary policies to boost the economy. An ideal example is the year 2006 policy by President Bush which was deficit spending, leading to a rise in debt levels. The boom that was created by this policy resulted in 2007 financial crisis ("Keynesian Economics," n.d.). Eventually, the president Obama policy resulted in ending of the Great Recession through the Economic Stimulus Act. Some of the achievements of the Act included allocation of $ 275 billion to grants, loans, and federal contracts, resulting in the creation of jobs for many citizens. Also, it resulted in a reduction in taxes by $ 288 billion as part of the expansionary policy ("Keynesian Economics," n.d.). Currently, the increase in debt by president Trump will result in a boom and bust cycle.
I agree to some extent with the Keynesians that government should come into solving macroeconomic problems. However, it would be more practical for intervention to take place in the short-run before harming the economy. I think governments should not wait for automatic adjustments by market forces or wait to solve issues when the economy is depressed. Resolving the economic problems in the early stages is better. Similarly, such policies should last for long because they can result in inflation or severe recession. The government should come up with policies to govern both contractionary and expansionary of government spending so that they do not negatively impact the economy.
b) Neoclassical Economics View
Unlike the Keynesian economists, neoclassical economist supports the long-run approach to solving microeconomic issues. They believe that the economy will eventually correct itself without the need for government intervention. They support the enabling of environment for the free market to operate. It supports deregulation and tax cuts. The neoclassic economist believes that supply will automatically drive the demand for goods and services. The supply side provides the necessary incentives which enable the businesses to expand. Also, when there are a tax cut and deregulation, there are no regulations, meaning companies can expand and grow faster.
The graph above shows the long-run aggregate supply as per the neoclassical point of view. The potential economic growth automatically results in the Long run aggregate supply curve to shift to the right. That means full employment capacity has increased from Y1 to Y2.Full employment occurs when all resources are utilized efficiently.
Even though I agree in the long –run effects as per the neoclassical view, the Keynesian view should come in to solve the economic issues. The government assistance is always critical when it comes to boosting the economy at the time of recession.
Reference
Keynesian Economics Theory: Definition - The Balance. (n.d.). Retrieved April 7, 2018, from https://www.thebalance.com/keynesian-economics-theory-definition-4159776
