Question

Based on your response for item 2.2 and after close observation of the Classical and Keynesian perspectives discussed in the course, share your position on the effectiveness of fiscal and monetary policies to deal with recession or inflation.

Answer 1

Recession occurs when the aggregate demand is low. The fall in the aggregate demand results into the fall in the output and employments.

Classical view: The classical regards that full employment is general condition and thus, government actions are not required to correct any recession that an economy suffers. Flexible price and wage restore the equilibrium automatically.

Further, the Active monetary and fiscal policy would result into the rise in the inflation only.

Keynes View: Keynes does not agree with the explanation of classical economists. Keynes does not view the full employment as the general condition. And active government intervention is required in forms of monetary and fiscal policies.

Monetary policy is not effective enough due to problem of liquidity trap, Thus fiscal policy is not effective tool when it comes to dealing with recession.