Topic Applicability of Models The topic: Can you relate the Classical and/or Key

Question

Topic Applicability of Models The topic: Can you relate the Classical and/or Keynesian macroeconomic models to assumptions about economic behaviors and to economics policies being implemented in the U.S. economy today? Discuss this with your group members. Is there anything that you've learned studying these models that gives you a better understanding of why the Obama administration's economists requested Congress to approve the "stimulus package"? Is there anything that you've learned studying these models that gives you a better understanding of alternative proposals that have been set forth for economic growth (or criticisms of the current policies)? Note: Please do not just post an answer to each of the questions. These questions are to get you started in your discussion-to make you think. Use one or two of them to get yourself started in relating the models to current economic policies. You will no doubt have your own questions that you will want to ask your group members as well.

Explanation / Answer

Classical economics proposes the least government interventions and believes in inherent economic forces to recover the economy on its own, whereas the Keynesian approach proposes the government interventions and implement policies to help the economy to recover. In present scenario, there is a prevalence of the Keynesian approach that that causes the government to take discretionary fiscal policy to help the economy after the financial crises of 2008. The Federal Reserve also came up with the monetary policy to help the economy recover. It is the reason that Obama administration went on to prepare a stimulus package for the USA economy. It was a significant intervention where government dedicated government spending for the different sectors, tax benefits for the different class of people and expansionary monetary policy with up to zero % Federal funds rate and lower reserve requirements. Such initiatives are on the economic basis that these initiatives will increase the demand. After seeing the increase in demand, supply will also increase. It will create new employment opportunities. As a result, a chain of positive economic activities will take place and economy will slowly recover.

Though, some economists criticize these initiatives, such as the issue of inside lags and outside lags, crowding out effects and liquidity trap in monetary policy. These issues reduce the positive impacts of the fiscal policy and monetary policy. Further, these spending will increase the burden of debt that will come back to the common population of the USA. There is another alternative in the form of automatic stabilizers that can help the aggregate demand and supply to achieve the equilibrium.

Therefore, it raises the question about policy alternatives and the best course of action in the present economic scenario and what should be the criteria of evaluation of the alternatives.

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