Suppose that worried about a recession, the government of theUnited States is th

Question

Suppose that worried about a recession, the government of theUnited States is thinking about increasing government spending ongoods and services to stimulate the economy. 1.1.   Which statement best identifies theview that classical macroeconomists have about expansionary fiscalpolicy? A.   Fiscal policy is the best policy tobring the economy out of a recession. B.   Fiscal policy has no effect onaggregate output and unemployment in either the short run or longrun. C.   Fiscal policy can increase aggregateoutput and decrease unemployment while lowering the aggregate pricelevel. D.   Fiscal policy might be useful, butmonetary policy should be considered first.

Explanation / Answer

b: The classical view of expansionary or contractionary fiscalpolicies is that such policies are unnecessary because there aremarket mechanisms—for example, the flexible adjustment ofprices and wages—which serve to keep the economy at or nearthe natural level of real GDP at all times. Accordingly, classicaleconomists believe that the government should run a balanced budgeteach and every year.

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