The Great Depression in 1929, sparked by a crash in the stock market, was a time which the U.S. economy suffered a tremendous loss in productivity resulting in negative GDP growth. Consumer spending and investment slowed for the next few years due to massive unemployment. “By 1933, when the Great Depression reached its nadir, some 13 to 15 million Americans were unemployed and nearly half of the country’s banks had failed” (“The Great Depression”). In tough economic times British economist John Maynard Keynes believed that government should step in the short run to boost the overall demand by instituting some form of economic spending stimuli. Classical economic theory would state that the economy will eventually work its way out of a crisis by allowing the natural demand in the free market to determine how quickly an economy will recover from a recession. Both the classical economic theory of demand and supply and the Keynesian theory will be compared and contrasted to see how each would impact an economic recovery. Also, the Keynesian’s theory has come under much criticism from economics professors as it comes with many risks once implemented.
The classic economic model contends that there should be minimal government involvement in a depressed economy. The government should not be attempting to artificially correct the demand and supply as this likely leads to an increase in long-term inflation. According to our text, economists supporting the classical model assuming pure competition, flexible wages, flexible prices and people’s self-interest any problems in the macroeconomy will be temporary (Miller). However, Keynes had a different view ...
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...ent years president Obama’s bailout of the ailing U.S. Automobile industry. Keynesians believe the spending stimulus is enough to outweigh the risk of long term inflation.
Quite often Keynes responded to the issues of long-term debt by his famous statement "In the long run, we are all dead". This statement would appear that Kaynes was not concerned about the long-term future of the economy. Rather, it was a statement to defend government spending and the immediate effect on the economy during ressionary periods.
Recessions are an inevitable component of the economic cycle, causing both demand and supply to reset in certain industries. However, they can be properly managed with sound tax and spend policies. Invariably, a mix of the Classic Economic Model and Keynesian Theory, when used wisely in the short-term, is best to propel an ailing economy out of a recession.
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