Classical v. Keynesian Approaches to Smoothing Business Cycles

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1. Classical v. Keynesian Approaches to Smoothing Business Cycles

Fiscal policies are the actions of Congress on spending and taxing. (Note that this is different from monetary policy, which is the action take by the Federal Reserve to change the money supply and interest rates.)

a. 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).

b. Are we in recession today? Use today’s real GDP growth rates to explain your answer.

c. 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.”

2. 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.

Explain how this government role does, or does not, solve a market failure such as an externality.

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