Economists Have Always Disputed The Appropriate Action ✓ Solved

Economists have always disputed the appropriate action to

Economists have always disputed the appropriate action to take to stimulate an economy out of a recession. Compare and contrast the recommendations for appropriate action of the monetarist theory and the classical model. Be sure your response is stated in terms of the relevant principles of both theories. Your response should include at least 200 words specifically relating to the similarities and differences between the recommendations of monetarist and classical theories for stimulating an economy out of a recession. Include at least 1 quality citation other than the text. Respond to at least two of your classmates’ postings.

Paper For Above Instructions

Throughout economic history, the debate surrounding the appropriate response to recessions has highlighted the differing views between monetarist and classical economic theories. While both theories aim to stimulate the economy and restore growth, their approaches and underlying principles significantly differ.

Monetarist Theory Overview

Monetarist theory, primarily associated with the economist Milton Friedman, emphasizes the role of government in controlling the money supply to influence economic activity. Monetarists argue that variations in the money supply have major short-term effects on national output and employment. During a recession, monetarists advocate for an increase in the money supply to lower interest rates, making borrowing cheaper. This, in turn, stimulates investment and consumer spending, leading to economic recovery (Friedman, 1968).

Classical Model Overview

On the other hand, the classical model, which has roots in the works of economists like Adam Smith and David Ricardo, posits that the economy is self-regulating. Classical economists believe that markets function efficiently on their own, and that any economic downturn will correct itself over time as prices and wages adjust to restore equilibrium. During a recession, classical theorists support policies that enhance supply-side factors, such as reducing taxes and deregulation, to promote production and ultimately economic growth (Hayek, 1944).

Similarities between the Theories

Despite their fundamental differences, both monetarist and classical theories acknowledge the importance of stable economic growth and the necessity of effective economic policies. Both schools of thought recognize that during economic downturns, addressing market failures and encouraging economic activity are crucial for recovery. Additionally, they agree that monetary stability is critical for sustained growth, suggesting that excessive inflation or deflation should be avoided (Mankiw, 2016).

Differences in Recommendations

The primary difference lies in the approach to managing the economy. Monetarists focus on monetary policy, believing that manipulating the money supply can effectively manage economic fluctuations. They tend to be wary of fiscal measures and government intervention, positing that these actions can lead to inefficiencies and distortions in the market (Friedman, 1970). In contrast, classical theorists prioritize supply-side solutions and advocate for minimal government intervention, arguing that allowing the market to self-correct is the most effective way to overcome recessions. Furthermore, classical economists emphasize the importance of long-term growth driven by production, while monetarists focus on short-term monetary adjustments to stimulate demand (Blanchard, 2016).

Implications of Each Theory

The implications of these differing views on economic policy are profound. Following monetarist recommendations during a recession might involve rapid increases in money supply through mechanisms like quantitative easing, while classical recommendations could involve structural reforms to enhance productivity. The choice between these strategies can affect inflation rates, unemployment levels, and the overall health of the economy (Krugman, 2009).

Conclusion

In summary, monetarist and classical economic theories provide distinct perspectives on how to stimulate an economy out of a recession. While monetarists advocate for monetary expansion to boost demand, classical economists recommend investing in long-term supply factors. Understanding these differences is essential for policymakers to devise effective strategies that will promote economic recovery and stability.

References

• Blanchard, O. (2016). Macroeconomics. Pearson Higher Ed.
• Friedman, M. (1968). The Role of Monetary Policy. The American Economic Review, 58(1), 1-17.
• Friedman, M. (1970). A Theoretical Framework for Monetary Analysis. The Journal of Political Economy, 78(3), 193-238.
• Hayek, F. A. (1944). The Road to Serfdom. University of Chicago Press.
• Krugman, P. (2009). The Return of Depression Economics and the Crisis of 2008. W. W. Norton & Company.
• Mankiw, N. G. (2016). Principles of Macroeconomics. Cengage Learning.
• Smith, A. (1776). The Wealth of Nations. Methuen & Co., Ltd.
• Ricardo, D. (1817). On the Principles of Political Economy and Taxation. John Murray.
• Samuelson, P. A., & Nordhaus, W. D. (2010). Economics. McGraw-Hill/Irwin.
• Stiglitz, J. E. (2000). Economics of the Public Sector. W. W. Norton & Company.