(a)(i) Which statement best describes the Classical Fiscal Policy prescription f

Question

(a)(i) Which statement best describes the Classical Fiscal Policy prescription for inflation? Do nothing. If V is stable, fiscal policy does not matter. Increase government spending and/or decrease taxes. Do nothing, the economy will self-adjust. Decrease government spending and/or increase taxes. (a)(ii) Which statement best describes the Classical Fiscal Policy prescription for a recession? Increase government spending and/or decrease taxes. Do nothing, the economy will self-adjust. Do nothing. If V is stable, fiscal policy does not matter. Decrease government spending and/or increase taxes. (b)(i) Which statement best describes the Keynesian Fiscal Policy prescription for inflation? Increase government spending and/or decrease taxes. Do nothing. If V is stable, fiscal policy does not matter. Do nothing, the economy will self-adjust. Decrease government spending and/or increase taxes. (b)(ii) Which statement best describes the Keynesian Fiscal Policy prescription for a recession? Decrease government spending and/or increase taxes. Increase government spending and/or decrease taxes. Do nothing. If V is stable, fiscal policy does not matter. Do nothing, the economy will self-adjust. (c)(i) Which statement best describes the Monetarist Fiscal Policy prescription for inflation? Do nothing. If V is stable, fiscal policy does not matter. Decrease government spending and/or increase taxes. Increase government spending and/or decrease taxes. Do nothing, the economy will self-adjust. (c)(ii) Which statement best describes the Monetarist Fiscal Policy prescription for a recession? Do nothing. If V is stable, fiscal policy does not matter. Decrease government spending and/or increase taxes. Do nothing, the economy will self-adjust. Increase government spending and/or decrease taxes. (d)(i) Which statement best describes the Keynesian Monetary Policy prescription for inflation? Incentives to increase savings; cut taxes and lower import barriers. Decrease the money supply. Inflation is caused by too much money in the economy. Increase the money supply. Lower interest rates increase investment. Decrease the money supply. Higher interest rates decrease investment. (d)(ii) Which statement best describes the Keynesian Monetary Policy prescription for a recession? Do nothing. Decrease the money supply. Higher interest rates decrease investment. Cut marginal tax rates; reduce government regulation. Increase the money supply. Lower interest rates stimulate investment. (e)(i) Which statement best describes the Monetarist Monetary Policy prescription for inflation? Increase the money supply. Lower interest rates increase investment. Decrease the money supply. Inflation is caused by too much money in the economy. Decrease the money supply. Higher interest rates decrease investment. Incentives to increase savings; cut taxes and lower import barriers. (e)(ii) Which statement best describes the Monetarist Monetary Policy prescription for a recession? Increase the money supply. Lower interest rates increase investment. Decrease the money supply. A recession is caused by too much money in the economy. Decrease the money supply. Higher interest rates increase investment. Do nothing but be patient. As output slows, interest rates will decline, and new investment will be stimulated. (f)(i) Which statement best describes the Supply Side Policy prescription for inflation? Increase the money supply. Lower interest rates increase investment. Provide incentives to increase savings; cut taxes and lower import barriers. Decrease the money supply. Inflation is caused by too much money in the economy. Decrease the money supply. Higher interest rates decrease investment. (f)(ii) Which statement best describes the Supply Side Policy prescription for a recession? Cut marginal tax rates; reduce government regulation. Increase the money supply. Lower interest rates stimulate investment. Do nothing. Decrease the money supply. Higher interest rates decrease investment.

Explanation / Answer

First question is answered below

1.

Correct option: (a) Do nothing, economy will self adjust

Reason: Classical economics believes in the concept of laissez-faire, that is an economy is always fully capable of adjusting itself to equilibrium without government intervention since supply creates its own demand and thus markets fully adjust themselves in equilibrium.

Thus, even in case of inflation, classical economists will believe in no government intervention and thus no fiscal policy, allowing markets to self adjust themselves to equilibrium.

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