Answer to Question #225517 in Macroeconomics for Shreyansh

Question

Compare and contrast Keynesian and neoclassical policy responses to business cycle

Answer 1

The Keynesian policy regards changes to the aggregate demand to result in fluctuations in the business cycle. The Keynesians argue that the policymakers try to reverse the inflationary periods and recessionary since they are not convinced that full employment is achievable by a self-correcting economy. 

The neoclassical policy emphasizes intensively on the aggregate supply. The growth of Long term productivity determines the potential GDP level. The change in aggregate demand has the potential of returning the economy to full employment. 

Whereas Keynesians advocate for a trade off that is acceptable between unemployment and inflation when resisting a recession, neoclassical economists claim that no existence of such a trade off.