Neo-classical And Keynsian

Question 1

Describe briefly what a neo-classical approach to recession is:

Answer 1

. They believe fall in ad- fall in costs (due to rising unemployment- lower labour costs- falling wages and input cost)- SRAS shifts right- economy recovers- return to natural rate of output at lower price level.
. They don’t believe government needs to boost AD in recession.

Question 2

Describe briefly what a neo-classical approach to inflation is:

Answer 2

Rise in AD (AD shifts right) positive output gap.
. Positive output gap wouldn’t be sustainable due to accelerating inflation- rise in costs- SRAS shifts left- economy returns to normal rate of output but at higher price level- loss of international competitiveness so they think monetary policy should control inflation.

Question 3

Describe briefly how neo-classical economists would increase economic growth:

Answer 3

Through supply-side policies- shift LRAS to the right- more goods and services at lower price level- sustainable economic growth- increases international competitiveness.
Don’t believe government should artificially boost AD- might cause accelerating inflation.