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Introduction
Classical theory in macroeconomics emerged during the industrial revolution when the

managers did not know how to train employees well. The theory was developed to help

managers in the controlling and guiding the employees. Fiscal policy is being utilized in order to

understand the financial management. Those who are from classical and Keynesian School of

thoughts believe that the economy needs their support to enable it to develop. Classical theory

argues that the economy is able to achieve its goals (Porter and Mark). One of the most

important goals that an economy should naturally achieve is the GPD. GPD can only be achieved

when a country decides to utilize all the available resources for development.
Fiscal policy is used to show how the government influence the economy. The

government can influence the economy either through taxation or spending. Keynesian theory is

also very important in an economy. It is used to calculate the equilibrium of GPD of an

established economy. This theory main relies on the information from the income expenditure.

The theory also argues that the output level at some instances will differ from the real GPD. The

aggregate of the expenditure should be capable of buying the GPD which is at the natural level

(Presutti Jr). This will ensure that the equilibrium is balanced. The GPD is not expected to fall

below the natural level. When such changes occur, the financial stability of a country may be

affected. Fiscal policy is very important to an economy. It can be used to develop an economy

that is growing at a slow rate. It can also be used to reduce the pace at which an economy is

developing. Fiscal policy normally affects the rate of demand that an economy has. The most

important feature of a fiscal policy is that it can be used to adjust the economy to a certain level.

It can make an economy to either develop or degenerate.

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Monetary policy is mainly used by central banks. The Central bank can use this policy to

determine the growth of an economy. This policy is mainly concerned with the interest rates. It

also deals with the manner in which money is being used in development of various sectors. The

theory was developed in order to attract more people to start their own businesses. The policy

will urge people to borrow money from various sources and spend it accordingly (Presutti Jr). In

short, monetary policy normally influence both the demand and supply of money. According to

the monetary theory, the supply of money is the most important feature of an economy. This is

the most important factor that is responsible for the development of an economy. The theory

further argues that as the supply of money increases, the demand for the same money will also

rise. This will automatically mean that when the supply of money increases, the economy will be

temporarily boosted (Porter and Mark).

The supply side theory mainly focuses on the increase in production. It argues that the

increase in production will lead to a corresponding increase in the rate of economic growth.

Factors such as the availability of capital, land and labor are put into consideration. The supply

side theory emphasizes on particular factors in order to render valid decisions. Some of the

common factors considered include taxes and deregulation. Organizations or Companies that are

known for employing large number of workers normally apply the knowledge of this type of

theory (Presutti Jr).

The type of theory to be applied depend on the situations at hand. During recession, the

best theory that can be applied is the Keynesian theory. According to the Keynesian view, the

expansionary fiscal policy tends to focus on the economy. The main role of this policy will be to

ensure that economic development is stimulated. Economic development is one of the most
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important issues within a country (Fine and Dimitris). This theory is therefore of great

importance to economists. They can apply it during recession in order to help out the situation.

During the period of inflation, monetary theory is the best kind of argument to apply.

Monetary theory focuses on the supply and demand for money. Inflation is a situation where the

prices of goods rises to very high levels. Supply of money should be regulated in order to control

the rate of inflation. When the supply is controlled, the demand will automatically adjust in

response to the prevailing conditions (Van den Bergh and John).

Stagflation is a condition where the rate of inflation increases with increase in the rate of

unemployment. Very many skilled youths lack jobs during this period. The rate of economic

growth will automatically reduce. The situation in mainly determined by the cost of production.

This condition is mainly common when the cost of production rises (Fine and Dimitris). The

prices of goods will automatically rise. The theory of monetary can also be applicable in this

case. Monetary theory is used to control the GPD of a country. This situation is normally being

addressed by the central bank. The Central Bank will ensure that the growth rate of the economy

is very stable.

Works Cited

Fine, Ben, and Dimitris Milonakis. From political economy to economics: Method, the social

and the historical in the evolution of economic theory. Routledge, 2009.

Porter, Michael E., and Mark R. Kramer. "The big idea: Creating shared value." (2011).
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Presutti Jr, William D. "Supply management and e-procurement: creating value added in the

supply chain." Industrial marketing management 32.3 (2003): 219-226.

Van den Bergh, Jeroen CJM, and John M. Gowdy. "The microfoundations of macroeconomics:

an evolutionary perspective." Cambridge Journal of Economics 27.1 (2003): 65-84.