Based on lecture and the text (Chapter 3), explain the Keynesian approach to the economy. How are supply side and neoliberalism different?
The Keynesian approach postulates that the economy can experience disequilibrium for some considerable period. For the Keynesian approach, it is imperative to have effective intervention by the government as a move to achieve the optimal aggregate demand in order to have lower the rate of unemployment and stimulate growth. If the level of savings is higher than the investments level, the economy will experience a recession. This is because the resultant low spending by the consumers will cause the firms to have an increasing amount of unsold goods, thereby reducing the level of investments. During a period of recession, individuals take rational moves for risk averse; hence, they raise the level of their savings, leading to a lower aggregate demand in the long-run. The Keynesian approach further asserts that lower levels of interest rates in an economy do not necessarily increase the consumption because of the income effect of the low rates, which mean that individuals have less income. According to Keynes, governments have the capacity to manage markets especially during economic downturns by raising demand and empowering the working class (Leicht & Fitzgerald).
The supply side emphasizes that growth in the economy is to be achieved by policies in taxation and fiscal aspects that raise the incentives for production. Under the supply side, it is crucial to have less regulation, free-trade, as well as low taxation for economic growth. Neoliberalism is the essentially the promotion of the free markets, reduced barriers to trade as well as the global movement of labor capital across various regions of the world. The movement causes global investors to look for the most favorable environments for investments in the quest for quick profits and capabilities to have a short time frame and an effective delivery suitable for investors. The supply side is different from neoliberalism in the sense that with neoliberalism, which is not the case in the supply side, there is a move to reduce government influence by privatization as well as austerity, and is in the actual sense not beneficial in the long-run
Part 2: Based on lecture and the text (Chapter 7), what was the impact of the crisis on average