Final answer:
The Austrian School attributes the Great Recession primarily to exceedingly low-interest rates that encouraged excessive borrowing. In contrast, Keynesian economics emphasizes the role of government intervention in stabilizing the economy through programs that support aggregate demand.
Step-by-step explanation:
According to the Austrian School of economics, the best explanation for what caused the Great Recession was that interest rates that were too low induced excessive borrowing by consumers and businesses. This line of thinking suggests that artificially low interest rates set by central banks created a boom in credit and investment that was unsustainable, leading to a subsequent bust.
Here's how the mechanism works: Low-interest rates reduce the cost of borrowing, which encourages more individuals and businesses to take out loans for consumption and investment purposes. The increased demand for loans can lead to a credit boom and potentially overinvestment in certain sectors, such as real estate prior to the Great Recession. Ultimately, once interest rates begin to rise or economic realities set in, the excessive levels of debt can become unmanageable, leading to defaults and a subsequent economic downturn.
The aggregate expenditure model, derived from Keynesian economics, suggests a different approach. It posits that during times of recession, government can stimulate the economy through investment and by influencing aggregate demand (AD). Increased government spending can offset the deficit in private investment, thereby stabilizing the economy. Programs established during the Great Recession, like the Troubled Asset Relief Program and tax rebate initiatives, aimed to encourage investment and consumption, mitigating the downturn's impact.