Question

A neoclassical economist and a Keynesian economist are studying the economy of Blueland. It appears that Blueland is beginning to experience a mild recession with a decrease in aggregate demand. Which of these two economists would likely advocate that the government of Blueland take active measures to reverse this decline in aggregate demand? Why?

Answer 1

It is the Keynesian economist. This is because according to the theory proposed by Keynes, major reason for a recession is a deficient demand. Government has to play an active role in expanding the economy and bringing it out of recession by increasing government expenditure or by reducing taxes. This policy of fiscal expansion is likely to shift the aggregate demand curve to the right. Neoclassical economist might propose to let the economy self correct itself because of vertical long run aggregate supply curve.