4. Explain the distinction between the major schools of thought (I.e., Classical Vs Keynesian,

Question

New Classical Vs New Keynesians) focusing on their tenets and policy implications?
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Answer 1

Classical Economics vs. Keynesian Economics:
Classical economics is based on the notion that the economy is self-regulating and tends toward full employment equilibrium. It believes that wages and prices are flexible, markets are efficient, and government intervention in the economy should be minimal. On the other hand, Keynesian economics, developed by economist John Maynard Keynes, argues that in times of economic downturns, market forces alone are not enough to ensure full employment. Keynesians believe in the importance of government intervention through fiscal and monetary policy to stabilize and stimulate the economy.

New Classical Economics vs. New Keynesian Economics:
New Classical economics emerged in the 1970s as a response to Keynesian economics and is based on the idea that individuals have rational expectations and markets quickly adjust to shocks. New Classical economists believe that government intervention in the economy is often counterproductive and can lead to inefficiencies. On the other hand, New Keynesian economics combines elements of both traditional Keynesian and Classical economics. It argues that there can be market failures and imperfections that justify government intervention, but also acknowledges the importance of rational expectations and market forces in shaping the economy.

Policy implications:
The differences in tenets between these schools of thought translate into different policy implications. Classical economists typically advocate for a hands-off approach by the government, emphasizing the importance of free markets and a limited role for government intervention. Keynesian economists, on the other hand, believe that government intervention through fiscal and monetary policy is necessary to stabilize the economy and ensure full employment.

New Classical economists argue that government intervention is often ineffective and can lead to unintended consequences, while New Keynesians believe in targeted government intervention to correct market failures and promote economic stability. Overall, the major schools of thought differ in their beliefs about the role of government in the economy and the effectiveness of various policy interventions in achieving economic goals.