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Keynesian Economic and Monetarist Economic Policy - Research Paper Example

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This paper shows the characteristics and differences between Keynesian economic policy and Monetarist economic policy as well as the reason why the Golden Age collapsed. Finally, the paper highlight which policy is more suitable in the current economic situation…
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Keynesian Economic and Monetarist Economic Policy
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Download file to see previous pages Such impressive growth was the outcome of Keynesian policies, such as the needs of intervention by the government (Discover the networks, 2012). This period was the golden age of Keynesianism. However, the world economy faced a big recession, which resulted from not only rising inflation and unemployment but also dropping economic growth, after 1973. People began to believe the newly risen Monetarism, which claims fiscal policy is not useful, due to the failure of Keynesianism.  Keynesian Economic Policies Keynes emphasized that aggregate demand in the economy can be influenced very effectively by altering the levels of government spending as well as tax rates (Nelson, 2006). The neoclassical economic theory could not explain the factors that led to the economic collapse of the country and was also unable to make some appropriate public policy that would help to solve the economic crisis. While the need for any kind of government intervention was rejected by the orthodox neoclassical economists, Keynes advocated that inactiveness on part of the government would only worsen the condition of unemployment in the economy and aggravate the situation of an economic downturn. John Maynard Keynes stated that in order to improve the economies the governments should raise levels of public spending and cut taxes. Neoclassical economists did not approve of this action in the given economic context since there was an established view embracing the lassie faire mode of the economy that claimed that in the market economy, if the market equilibrium is disturbed, the economy has the potential to make an automatic recovery, without necessitating any government intervention. In contrast to this, Keynes argued that in an economy in which there is the high rate of unemployment with low aggregate demand, the economy would ultimately get weaker if indefinitely demand is allowed to fall short of the productive capacity of the economy. The solution proposed by Keynes was to stimulate demand in the economy. The policy directions made by the economists were discretionary fiscal policy changes that were to the made by the government in accord with the condition of the economy. When the country is in recession, the government is responsible for increasing public spending so that it raises the aggregate demand in the economy. Higher levels of government spending would boost demand both directly and indirectly. Government's expenditure increases the incomes of the workers who make higher levels of demand.   ...Download file to see next pagesRead More
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