Keynesian Explanation of Recent Economic Performance
The business cycle describes the natural fluctuations of the economy. It is a period of expansion and contraction that occurs over time. In the last few years, the economy has experienced a mix of growth and decline. Keynesian economists would attribute the country’s economic condition in 2021–2022 to a decline in aggregate demand (Ghosh & Ghosh, 2020).
The COVID-19 epidemic, which has lowered consumer confidence and expenditure, is to blame for this decline (Jackson et al., 2021). Moreover, the epidemic has reduced corporate investment, which lowers aggregate demand (Jackson et al., 2021). The fact that GDP declined during the epidemic is one of the proofs in favor of this claim. The Bureau of Economic Analysis estimates that the U.S. GDP fell by 31.4% in the second quarter of 2020 (BEA, 2020). This is one of the sharpest declines in economic activity.
Neoclassical Explanation of Recent Economic Performance
On the other hand, neoclassical economists would explain the performance of the economy during 2021-2022 as being affected by a decrease in aggregate supply. Due to supply chain inefficiencies, company closures, and labor shortages brought on by the COVID-19 pandemic, output and supply have been reduced (Jackson et al., 2021). Prices have risen due to the overall supply shrinking, as companies have had to raise prices to offset costs (Jackson et al., 2021). The fact that the Consumer Price Index climbed by 5.4 percent in July 2021 is proof in favor of this claim (BLS, 2021). This further supports the idea of a decrease in aggregate supply due to the pandemic.
Evaluation and Personal Interpretation
After evaluating the evidence presented by both Keynesian and neoclassical economists, I find it makes the most sense that the Keynesian explanation is more accurate. Evidence suggests that the pandemic’s effects on aggregate demand have had a higher economic impact than those of the pandemic’s effects on aggregate supply. While the epidemic undoubtedly caused supply chain delays and labor shortages, the overall economy has been far more negatively impacted by the decline in consumer confidence and expenditure.
References
BEA. (2020). Gross Domestic Product, 4th quarter and year 2020 (Advance Estimate). Web.
BLS. (2021). Consumer Price Index-July 2021. Web.
Ghosh, A. N., & Ghosh, C. (2020). An introduction to economics: Economic theory and society. Springer Nature Singapore.
Jackson, J. K., Weiss, M. A., Schwarzenberg, A. B., Nelson, R. M., Sutter, K. M., & Sutherland, M. D. (2021). Global economic effects of COVID-19. Congressional Research Service. Web.