Fiscal policies are the actions of Congress on spending and taxing. (Note this is different from monetary policy, which is the action taken by the Federal Reserve to change the money supply and interest rates.)
Explain and compare the Keynesian and classical points of view on whether or not to intervene during the business cycle (an expansion = positive real GDP growth; and a recession = negative real GDP growth).
Are we in recession today? Use today's real GDP growth rates to explain your answer.
As the President's chief economist, describe the Keynesian fiscal policy you think the administration should follow, given today's economic conditions. Support your point of view using principles of Keynesian economics, as described by Mayer in Chapter 16 of Everything Economics.
What Role for Government? In Chapter 3, Wheelan describes a number of ways in which the "government is your friend" in a well-functioning society and economy. List and explain two ways that, in your everyday lives, there is a need for an effective government role in an economy.
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Classical v. Keynesian Approaches to Smoothing Business Cycles
Full Answer Section
The United States is not currently in a recession. The real GDP growth rate in the third quarter of 2022 was 2.3%, which is above the long-term average of 2%. However, there are some signs that the economy may be slowing down. The unemployment rate is still high, and inflation is rising. If these trends continue, the economy could enter a recession in the near future.
As the President's chief economist, describe the Keynesian fiscal policy you think the administration should follow, given today's economic conditions.
If I were the President's chief economist, I would recommend a Keynesian fiscal policy to stimulate the economy. This would involve increasing government spending and/or cutting taxes. The goal of this policy would be to increase aggregate demand and boost economic growth.
I would support my recommendation using the principles of Keynesian economics, as described by Mayer in Chapter 16 of Everything Economics. Mayer argues that government spending can be used to "prime the pump" of the economy and create jobs. He also argues that tax cuts can stimulate consumer spending, which can lead to economic growth.
What Role for Government?
Wheelan argues in Chapter 3 of Everything Economics that the government plays an important role in a well-functioning society and economy. He cites two examples of how the government can help to improve our lives:
- The government provides public goods, such as national defense, that would not be provided by the private sector.
- The government regulates the economy to protect consumers and workers from harm.
Sample Answer
Fiscal policies are the actions of Congress on spending and taxing. They are used to influence the economy in a number of ways, including stimulating growth, reducing unemployment, and controlling inflation.
Keynesian and classical economists have different views on whether or not to intervene during the business cycle. Keynesians believe that the government should intervene to stabilize the economy during recessions. They argue that the private sector is not always able to self-correct, and that government intervention can help to prevent or shorten recessions.
Classical economists, on the other hand, believe that the government should not intervene in the economy. They argue that the private sector is self-correcting, and that government intervention can actually make the recession worse.
Are we in recession today?
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