Question

We have seen that a massive expansionary fiscal and monetary policy is required to combat COVID aftereffects. Once the COVID crisis passes it will most likely create huge inflationary pressures in the economy. How will the classical macroeconomists manage this situation?

Answer 1

Answer - The classical economists believe that the economy is self correcting and hence no intervention is needed from any authority. The inflation bought by the corrective measures in pandemic , will be self corrected. The rise in price levels currently will bring the demand down in economy and supply will rise at geater price levels. The decrease in AD and increase in AS will thus lead to the obtaining of the equilibrium level of economy without any intervention.