Question

Which of the following policy recommendations are consistent with the Keynesian, Monetarist, and/or Supply-Side views of the macroeconomy and stabilization policy? EXPLAIN CAREFULLY!

C. Increase the money supply in order to alleviate a recessionary gap (i.e. a situation where current real GDP is below potential real GDP).

D. Support a balanced budget amendment

E. Balance the federal budget over the course of the business cycle.

F. Practice functional finance each federal fiscal year.

Answer 1

C. This is Keynesian policy recommendation as he stated that by putting an expansionary fiscal policy one can help stimulate economic activity, thus by increasing money supply in the economy it will increase eventually output.

D. This is a monetarist view as they refrain from seeking more additional government borrowing and that the main priority and long term solution would be to run a balanced budget.

E. This is Keynesian policy recommendation propelled by other thinkers, that governments need to spend in times of crisis, the budget can balance itself over the course.

F. This is supply side view based on Keynesian policy recommendation as the best way to drive growth is to provide finance to improve growth and jobs in the economy.