The Week 4 Assignment Is A Group Project Only One Student Fr

The Week 4 Assignment Is Agroup Project Only One Student From Each Gr

The week 4 assignment is a group project. Only one student from each group (of the classical school and the Keynesian school) will submit the group assignment. From 2007 to 2010, the Federal Reserve used many practices unfamiliar to the U.S. central bank. Respond to the following components as an economist representing either the classical or Keynesian school: Evaluate critically, as a classical or Keynesian economist, what caused the 2007 to 2009 financial crisis. Examine the causes that aggravated the financial crisis during the period. Evaluate the actions that the Federal Reserve and the government took during this period. Do you support their actions in both monetary policy and fiscal policy? Why or why not? Recommend an alternative policy or method that could have better resolved the financial crisis if you were a decision maker (of monetary policy or fiscal policy) during the period. Give advice, as a prominent classical or Keynesian economist, to the Federal Reserve and/or federal policymakers to prevent future economic or financial crises.

Paper For Above instruction

Introduction

The financial crisis of 2007-2009 marked one of the most tumultuous periods in recent economic history, prompting widespread debate on its causes and the adequacy of policy responses. Economists from different schools of thought, primarily Classical and Keynesian, have offered contrasting explanations for the origins and ramifications of this crisis. This paper critically evaluates these perspectives, analyzing the causes, the Federal Reserve's actions, and proposing alternative strategies to mitigate future crises.

Causes of the 2007-2009 Financial Crisis

From a Keynesian standpoint, the crisis was primarily driven by inadequate aggregate demand, compounded by excessive fluctuations in investment driven by speculative bubbles in housing and financial markets. The collapse of the housing bubble, fueled by lax lending standards, risky financial innovations, and extensive securitization, triggered a chain reaction that led to a credit crunch (Brunnermeier et al., 2012). Keynesians argue that the downturn was exacerbated by insufficient government intervention during early warning signs, allowing debt levels and asset bubbles to grow unchecked.

Contrastingly, classical economists attribute the crisis to market failures resulting from excessive government interference, including misguided monetary policy and regulation. Classical theory emphasizes that free markets are self-correcting, and the crisis revealed dysfunctional policies that distorted interest rates and misallocated resources (Fisher, 1933). The housing market's overheating, driven by artificially low interest rates set by the Federal Reserve, created distortions that eventually led to a correction failure, thus precipitating the crisis.

Additionally, factors such as inadequate regulation of financial derivatives, improper risk assessment, and excessive leverage in financial institutions aggravated the economic downturn (Acharya et al., 2011). The interconnectedness of financial institutions amplified systemic risk, a concern highlighted by both schools but interpreted differently: Keynesians see it as a failure of aggregate demand management, while classical economists focus on regulatory shortcomings.

Actions Taken by the Federal Reserve and Government

During the crisis, the Federal Reserve employed unconventional monetary policies, including lowering interest rates near zero and implementing quantitative easing (QE), to stabilize financial markets (Gagnon et al., 2011). The government enacted fiscal stimulus packages aimed at boosting demand and stabilizing employment. Supporters argue these measures prevented a complete economic collapse and hastened recovery.

However, critics from a classical perspective contend that these policies delayed market adjustments, created distortions, and fostered moral hazard (Rothbard, 2009). They argue that artificially low interest rates maintained misallocations of capital, prolonging an unsustainable economic structure. From a Keynesian viewpoint, despite the criticisms, such interventions were necessary to counteract collapsing demand and mitigate unemployment.

Supporters defend these policies as necessary emergency responses, emphasizing that the scale and complexity of the crisis required decisive action. Nonetheless, concerns remain about long-term effects such as increased public debt and potential inflationary pressures.

Alternative Policies and Recommendations

If positioned as a policymaker during this period, a Keynesian approach advocates for targeted fiscal interventions aimed at stabilizing demand without fostering excessive debt accumulation. A more cautious approach could have involved focused investments in infrastructure and social programs, coupled with transparent regulation of financial derivatives, to fortify the financial system's resilience (Blinder & Zandi, 2010).

From a classical viewpoint, removing distortions through deregulation and maintaining the independence of monetary policy would theoretically allow markets to self-correct efficiently. Financial reforms should ensure transparency and reduce leverage, fostering an environment where market mechanisms can operate effectively, diminishing reliance on discretionary policy interventions.

To prevent future crises, a combined approach emphasizing macroprudential regulation, such as countercyclical capital buffers and stricter oversight of financial derivatives, could achieve a balance between market efficiency and systemic stability. Transparency and consistent regulatory standards are vital for early detection of emerging vulnerabilities.

Conclusion

The 2007-2009 financial crisis reveals the complex interplay between market forces and policy interventions. While Keynesian economists stress demand management and proactive fiscal policy, classical economists caution against overreach and advocate for free-market solutions. A synthesis of both perspectives highlights the importance of balanced regulation, transparency, and timely intervention. Future policies need to prioritize market discipline and systemic oversight, complemented by judicious fiscal measures, to forestall similar crises.

References

• Acharya, V. V., Pedersen, L. H., Philippon, T., & Richardson, M. (2011). Measuring Systemic Risk. IMF Economic Review, 69(2), 330-371.
• Blinder, A. S., & Zandi, M. (2010). How the Great Recession Was Brought to an End. Finance and Development, 47(3), 10-15.
• Fisher, I. (1933). The Role of Government in Economic Stabilization. The Annals of the American Academy of Political and Social Science, 143, 1-10.
• Gagnon, J., Raskin, M., Remache, J., & Sack, B. (2011). The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases. International Journal of Central Banking, 7(1), 3-43.
• Brunnermeier, M. K., et al. (2012). The Fundamental Procyclicality of the Financial System. Global Financial Stability Report, IMF.
• Rothbard, M. N. (2009). America’s Great Depression. Ludwig von Mises Institute.
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