Keynesian Approach Vs The Classical Approach to Fiscal Policy

Introduction

Supply comes first since demand would not be complete if there are no products in the market. Therefore the introduction of products and hence their supply and consequent promotion determines whether the consumers will want to buy the products or have a higher or lower demand for the commodity. If the product introduced in the market is unpopular with the people its life cycle closes. If the popularity of the product is increased by marketing and demand stabilizes, its life cycle is restored which shows that supply determines demand in the end, or supply comes first.

Keynesian economics is all about spending to stimulate the economy it does not matter how the spending is done whether by governments or individuals or corporations (Chakraborty, 2010). A temporal stimulus package does not have a great impact on the economy since individuals may not spend the money but choose to pay debts or save altogether as most of the society is to either credit or using credit cards, which accumulate debt over time. As a result, there is less spending that does not stimulate the economy. If there is a permanent stimulus on individual income, it will stimulate the economy in the end. Aggregate supply and demand are important to any economy. The increase in demand automatically leads to an increase in the provision of the product. The increased demand raises prices while increasing spending on the population. Supply and demand are therefore important factors in driving the economy of a nation.

The government especially the executive uses implements fiscal policy, which involves expenditure and taxes to stimulate the economy (Mankiw, 2007). Classical theory is of the view that contractionary or expansionary fiscal policies are unnecessary which contrasts with that of Keynesian theory, which is of the opinion that the contraction or expansionary fiscal policies are useful in determining macroeconomic outcomes.

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