Question

1. In recent years the federal government was trying to “correct” the Great Recession in the United States by both increasing government spending and increasing the stock of money.

1. IF the economy operated as the Classical economists thought, what impact would these have had? (Just briefly explain this without providing any underlying analysis.)

2. Trace the impact of an increase either M or G through the classical model noting the impacts on the key variables of Y, N, W, P, W/P, r, I, G and T. Briefly explain how your result here confirms your statement in answering 2.a.

Answer 1

Solution A

Classical economists believe that economy worked well under monarchy government regulations. This would affect economic growth drastically as government would increasingly lower taxes and increased government spending to exorbitant value such that it can lead to full employment and hyperinflation Nd hence is concern.

Solution B

In such expansionary fiscal policy the real GDP increase and so does national income and full employment. However due to higher supply in market interest rates cone down and taxes too get decreased simultaneously . Rise in prices is coupled with rising inflation .