Question

Our last discussion question for this course is a fitting one, since it seeks to cap off this introductory look at macro. by assessing the relevant theory that has been developed to date. As your text indicates, there are two broad schools of macroeconomic thought that have been competing for the public mind over the last few decades. The Keynesian, or Mainstream view, sees the economy as being prone to shocks, and is concerned primarily with achieving full employment and seeks to use government intervention (primarily activist fiscal policy) at boosting aggregate demand to achieve that objective. The Classical School (including the Monetarist branch of that school) sees the economy as being mostly self-correcting, and is more concerned with macroeconomic stability – particularly price stability – and prefers monetary policy over fiscal policy in achieving this goal. Although there has been a fair amount of consensus as to some of the major items of analysis, there still remain some controversies, particularly with regard to whether government policy is even effective at managing the macroeconomy. What do you think of these divergent views as to government policy? Has one side of this debate won the majority of the argument here, or do both sides have points in their favor? In either case, though, are there times when one set of theories is called for, and then times when the other is?

Answer 1

No one side has ever won majority as we have seen various examples when either of fiscal policy or monetary policy have not worked out independently .

For example the US Recession in 2008, government had cut down taxes and increased spending as fiscal policy however this alone did not work out. Monetarist tgeory was implemented where interrest rates were reduced to all time low to bring price stability and economic liftoff.

Even in Venezuelan market recently Government has implemented monetary view to cut down hyperinflation and hence raised interest rates to all time high. However this alone does not take out economy from its worst situation. Government had to implement austerity measures and increase taxes to end this situation .

So it is combination of two theories which collectively bring the economy to recovery and hence no one policy view is perfect enough to conclude as best.

answered by: anonymous