The problem of market failure became painfully clear 1929 when, when following the stock market crash, the Great Depression set in. John Maynard Keynes argues that the free market, if left without government interference would correct itself in the long run — a favorite comment of conservative economists. A society based on free market principles sounds good in theory. But when the public and policymakers believe that government needs to intervene to correct a problem, they create or alter policies. In a pure capitalist or market system, most economists would not consider the plight of family farmers who cannot compete with large agribusiness or the challenges that other small business face as a legitimate reason for government intervention. Intrusion into the market creates distortions in the efficiency of with which a competitive market economy allocates its resources. However, economists acknowledge that when the private market is not efficient intervention is warranted. Governments have a variety of tools to help them deal with economic issues.
Explain the difference between fiscal policy and monetary policy. How does each tool work? Who is responsible for them?
