After the aggregate demand decreases in part a above what ki

After the aggregate demand decreases in part “a” above, what kind of a demand-management policy would a typical liberal economist propose, an active policy or do nothing? How about a conservative economist? What justifications would they provide for their respective proposed policies?

Solution

If demand decreased, a liberalist economist would advocate an economic policy by the government to stimulate demand in times of high unemployment. For example, the government may spend more on public works using fiscal policies as the primary means of stabilizing business cycles.

Stagflation was the term used by conservative economist to combat the condition of decreased demand. It’s a situation where inflation is high, the economic growth rate slows, and unemployment remains steadily high. The supply-side economics is a macroeconomic theory argued that economic growth can be most effectively created by investing in capital, and by lowering barriers on the production of goods and services.

*****