Which of the two major approaches to Economic policy (Keynesian or Classical) will lead the USA out of the economic crisis faster? What are two differences between those two types of economic policies?
This topic is very much of current interest because the U.S. economy is having quite a hard time these days. In order to properly review the problem I believe it is important to look deeper into the economic crisis of the United States.
The problem with the US economy is very complex. One of the key problems lies in the huge public debt that accounts for $ 14,710,435,135,562,26 as of September 19, 2011.
The problem with an enormous public debt of the U.S. is accompanied by the ...view middle of the document...
The Classical economists believe that monetary methods used by the government in critical situations can only worsen the economic situation in the long term period. The economy should regulate itself. Supply will create its own demand.
The Keynesian approach on the other hand holds the idea that some collectively taken microeconomic level actions may lead to poor macroeconomic outcomes, wherein the economy would operate below its potential levels of efficiency. This mostly concerns the situation under which supply exceeds demand, specifically when the total production is higher than the resources available to purchase the produced products. Such a situation results in recession of economy.
Keynesian theory claims that in such a situation, government policies may be used to increase demand, thus leading to the reduction in unemployment and deflation.
The Keynesian approach implies that economy cannot sustain self regulation, thus the governmental interference is inevitable.
Undoubtedly the US government now faces a lot of major problems. It needs to create jobs and boost the economic growth. I believe that the optimal approach to economic policy of the United States would be the Keynesian approach.
Keynes assumed that there can be two main approaches to dealing with economic recession: reduction of interest rates and government investment in infrastructure.
If the state places a large order in some enterprises, it will result in employment of additional manpower for these firms. Those who were unemployed will receive wages and will be able to increase their spending on consumer goods, and, accordingly, will increase the aggregate economic demand. This, in turn, would increase the aggregate supply of goods and services and general health of the economy.
The main argument against classical approach to economic policy is the lack of a clear mechanism of dealing with the recession in the short term,...