Question

The economy is under inflationary pressure. The head of the President's Council of Economic Advisers is a staunch Keynesian. What will this Keynesian recommend or not recommend? Explain. Prior to the 1930s, classical economics was the predominant theory about the behavior of the aggregate price level, aggregate output, and the appropriate role of monetary policy. Describe how classical economists believed the economy would be affected by an increase in the money supply.

Prior to the 1930s, classical economics was the predominant theory about the behavior of the aggregate price level, aggregate output, and the appropriate role of monetary policy. Describe how classical economists believed the economy would be affected by an increase in the money supply.

Answer 1

Keynes would adopt a contractionary fiscal policy means that there will be a rise in the interest rates to reduce the inflationary pressure.The higher interest rate would reduce the consumption expenditure by the people as the bank will increase the rates for lending.

Prior to 1930's, an increase in the money supply would both increase the price level as well as the aggregate output economy.Since the economy is already under inflationary pressure, an increase in the money supply might worsen the situation as unemployment level might fall(Okun's law).