(1) Discuss the policy tools recommended by Keynes using fiscal policy and the opposing point of view of classical laissez-faire (market forces) that Hayek believes in.
(2) What do you believe and why?
The essential element of Keynesian economics is the idea the macroeconomy can be in disequilibrium (recession) for a considerable time. Keynesian economics advocates higher government spending (financed by government borrowing) to help recover from a recession.
Keynesian economics includes
- Disequilibrium in macro economy (insufficient demand)
- Imperfect labour markets (e.g. Sticky wages)
- Paradox of thrift (in recession, individuals save more, but this worsens the economic downturn
- Liquidity trap. When low-interest rates fail to boost demand.
- Importance of confidence to economic cycle.
- Deficit spending. In recession, Keynes advocated government borrowing to provide an injection of demand into the economy.
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