High School

7.(3 pt.) Formulate and compare briefly major ideas of classical macroeconomists and Keynesian macroeconomists. List current common macroeconomic ideas shared by majority of economists ("The modern consensus")

Answer :

Classical macroeconomists believed in the idea of Say’s Law, which states that supply creates its own demand.

This law suggests that government intervention in the economy is unnecessary as the economy will adjust to any imbalances in the market. Keynesian macroeconomists, on the other hand, argue that government intervention is necessary in order to maintain full employment and avoid recessions.

They argue that in times of recession, the government should use fiscal and monetary policy to increase aggregate demand in the economy.

The modern consensus among macroeconomists is that both fiscal and monetary policy should be used to effectively manage economic cycles.

This means using fiscal policy to increase or decrease government spending or to adjust the level of taxation in order to stimulate the economy during a recession or to reduce inflation during an economic boom.

Monetary policy is used to increase or decrease the money supply in order to manage the rate of interest and encourage investment. Both fiscal and monetary policies should be used together to effectively manage the economy.

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