Economic Stimulus Plan
The world has been experiencing an economic recession since 2008. As a result, the economies of many countries around the world were affected in a negative way. To respond to this recession, the United States government came up with an economic stimulus plan that aimed at controlling inflation.
However, the expectations of this fiscal policy were not realized since the level of unemployment and inflation are relatively high. To resolve this problem, the government in conjunction with the congress has proposed a new stimulus plan worth $200 billion. Just like the predecessor, this fiscal policy will aim at reducing the unemployment rate and maintaining an affordable price level for the goods and services offered within the country.
The 2008 recession was characterized by massive employee lay-offs especially in the private sector (Patil, 2012). Firms within the private sector sought to lay-off their employees as a means of cutting down operating costs. Some of these companies filed for bankruptcy due to massive debts.
This left millions of US citizens unemployed. Thus, to stabilize this situation, the government should make direct investment to rejuvenate the operations of these companies. This would increase the level of employment and the economic situation as a whole. This plan should also focus on cutting down bank lending rates. Increment of bank lending rates is one of the monetary measures that is use to curb inflation (Patil, 2012).
However, this reduces the disposable income available for investments. Thus, by reducing the lending rates, individuals can take loans to start small and medium sized enterprises. This will not only reduce the level of unemployment but it will also improve the status of the economy.
Finally, a fair proportion of the money should be used to reduce taxation rates and on tax rebates. This should mainly focus on loans and mortgages offered by public institutions. This will increase the disposable income of individuals encouraging investments and savings.
With this economic stimulus plan in operation, the government shall be able to increase the aggregate demand of the US economy. Increase in the employment rates shall be one of the results of this plan. Additionally, the government shall be able to stabilize the prices of goods and services within the nation. This will encourage expenditure thus increasing the amount of money in circulation. In the long run, the economic growth rate shall increase and stabilize at an optimum level.
Classical and Keynesian Approaches
According to the classical theory, economic imbalance is the main cause of recession. The theory further states that the economy is a self-sustaining unit and in case of an imbalance, it will automatically adjust itself to an equilibrium (Patil, 2012). Thus, according to classical economists, the current high unemployment rate is as a result of a low number of people who are willing to work at the current price level.
Thus, to reduce this rate, the government should increase the wage rate that will in turn increase the number of people who are willing to work. This will in turn increase the demand for employees hence reducing unemployment. Keynesian theory on the other hand is slightly different. According to this theory, the best way a government can control inflation is by increasing the level of spending and reducing tax levels (Patil, 2012). This will increase the disposable income of individuals hence increasing the aggregate demand.
Conclusion
Given the Classical and Keynesian approaches, it is evident that the Keynesian approach is more practical. This is because the price levels of an economy are rigid unlike the Classical approach assumptions of flexibility. Thus, to control the recession, the government needs to come up with measures and policies that will have impact on the entire economy and not specific sectors only. Therefore, this stimulus plan should focus on reducing taxes and encourage of spending.
Reference
Patil, S. (2012). Classical Economics vs. Keynesian Economics. Web.