Question

How an economist thinks that the economy works—is it self-regulating or not?—influences his opinion of the role government should play in trying to stabilize the economy.

Answer 1

The economy is not always self regulating. There is either excess demand or shortfall in demand quite often. E. G during great demand there was lack of aggregate demand for a quite long time. Similarly during financial crisis there was shortage of aggregate demand and excess supply. The economy does not run as per says law or as per Adam smiths invisible hand. The govt needs to intervene to raise effective demand during depression and to reduce inflationary tendencies during boom. The govt needs to smoothen fluctuations produced by private agents.