Classical View: According to classical theory, the economy should be left idle because recessionary gap will exist only in the short run. Hence, policy makers should follow strategy for the long run. Any change in money supply leads to change in price level. Monetarist View: According to them, government should not follow discretionary fiscal or monetary policy . It is because such policy will make the situation even worse, the real GDP will grow steadily without any inflationary pressure if the money supply grows steadily in an economy. Modern Consensus: Both monetary and fiscal policy can reduce recessionary gap. But in a situation like liquidity trap, monetary policy is ineffective. Hence, discretionary monetary policy is preferred more than discretionary fiscal policy. Keynesian policy: According to the Keynesian policy, the government should increase expenditure or reduce tax in order to induce consumption spending by increasing disposable income. This means to follow expansionary fiscal policy which would increase aggregate demand and fill the gap.

Question

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Answer 1

Question

Chapter 32, Problem 7P

To determine

Concept Introduction:

Classical View: According to classical theory, the economy should be left idle because recessionary gap will exist only in the short run. Hence, policy makers should follow strategy for the long run. Any change in money supply leads to change in price level.

Monetarist View: According to them, government should not follow discretionary fiscal or monetary policy. It is because such policy will make the situation even worse, the real GDP will grow steadily without any inflationary pressure if the money supply grows steadily in an economy.

Modern Consensus: Both monetary and fiscal policy can reduce recessionary gap. But in a situation like liquidity trap, monetary policy is ineffective. Hence, discretionary monetary policy is preferred more than discretionary fiscal policy.

Keynesian policy: According to the Keynesian policy, the government should increase expenditure or reduce tax in order to induce consumption spending by increasing disposable income. This means to follow expansionary fiscal policy which would increase aggregate demand and fill the gap.

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Answer 2

Question

Chapter 32, Problem 7P

To determine

Concept Introduction:

Classical View: According to classical theory, the economy should be left idle because recessionary gap will exist only in the short run. Hence, policy makers should follow strategy for the long run. Any change in money supply leads to change in price level.

Monetarist View: According to them, government should not follow discretionary fiscal or monetary policy. It is because such policy will make the situation even worse, the real GDP will grow steadily without any inflationary pressure if the money supply grows steadily in an economy.

Modern Consensus: Both monetary and fiscal policy can reduce recessionary gap. But in a situation like liquidity trap, monetary policy is ineffective. Hence, discretionary monetary policy is preferred more than discretionary fiscal policy.

Keynesian policy: According to the Keynesian policy, the government should increase expenditure or reduce tax in order to induce consumption spending by increasing disposable income. This means to follow expansionary fiscal policy which would increase aggregate demand and fill the gap.

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Answer 3

Question

Chapter 32, Problem 7P

To determine

Concept Introduction:

Classical View: According to classical theory, the economy should be left idle because recessionary gap will exist only in the short run. Hence, policy makers should follow strategy for the long run. Any change in money supply leads to change in price level.

Monetarist View: According to them, government should not follow discretionary fiscal or monetary policy. It is because such policy will make the situation even worse, the real GDP will grow steadily without any inflationary pressure if the money supply grows steadily in an economy.

Modern Consensus: Both monetary and fiscal policy can reduce recessionary gap. But in a situation like liquidity trap, monetary policy is ineffective. Hence, discretionary monetary policy is preferred more than discretionary fiscal policy.

Keynesian policy: According to the Keynesian policy, the government should increase expenditure or reduce tax in order to induce consumption spending by increasing disposable income. This means to follow expansionary fiscal policy which would increase aggregate demand and fill the gap.

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Answer 4

Question

Chapter 32, Problem 7P

To determine

Concept Introduction:

Classical View: According to classical theory, the economy should be left idle because recessionary gap will exist only in the short run. Hence, policy makers should follow strategy for the long run. Any change in money supply leads to change in price level.

Monetarist View: According to them, government should not follow discretionary fiscal or monetary policy. It is because such policy will make the situation even worse, the real GDP will grow steadily without any inflationary pressure if the money supply grows steadily in an economy.

Modern Consensus: Both monetary and fiscal policy can reduce recessionary gap. But in a situation like liquidity trap, monetary policy is ineffective. Hence, discretionary monetary policy is preferred more than discretionary fiscal policy.

Keynesian policy: According to the Keynesian policy, the government should increase expenditure or reduce tax in order to induce consumption spending by increasing disposable income. This means to follow expansionary fiscal policy which would increase aggregate demand and fill the gap.

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Answer 5

Chapter 32, Problem 7P

To determine

Concept Introduction:

Classical View: According to classical theory, the economy should be left idle because recessionary gap will exist only in the short run. Hence, policy makers should follow strategy for the long run. Any change in money supply leads to change in price level.

Monetarist View: According to them, government should not follow discretionary fiscal or monetary policy. It is because such policy will make the situation even worse, the real GDP will grow steadily without any inflationary pressure if the money supply grows steadily in an economy.

Modern Consensus: Both monetary and fiscal policy can reduce recessionary gap. But in a situation like liquidity trap, monetary policy is ineffective. Hence, discretionary monetary policy is preferred more than discretionary fiscal policy.

Keynesian policy: According to the Keynesian policy, the government should increase expenditure or reduce tax in order to induce consumption spending by increasing disposable income. This means to follow expansionary fiscal policy which would increase aggregate demand and fill the gap.

Answer 6

Chapter 32, Problem 7P

To determine

Concept Introduction:

Classical View: According to classical theory, the economy should be left idle because recessionary gap will exist only in the short run. Hence, policy makers should follow strategy for the long run. Any change in money supply leads to change in price level.

Monetarist View: According to them, government should not follow discretionary fiscal or monetary policy. It is because such policy will make the situation even worse, the real GDP will grow steadily without any inflationary pressure if the money supply grows steadily in an economy.

Modern Consensus: Both monetary and fiscal policy can reduce recessionary gap. But in a situation like liquidity trap, monetary policy is ineffective. Hence, discretionary monetary policy is preferred more than discretionary fiscal policy.

Keynesian policy: According to the Keynesian policy, the government should increase expenditure or reduce tax in order to induce consumption spending by increasing disposable income. This means to follow expansionary fiscal policy which would increase aggregate demand and fill the gap.

Answer 7

Chapter 32, Problem 7P

To determine

Concept Introduction:

Classical View: According to classical theory, the economy should be left idle because recessionary gap will exist only in the short run. Hence, policy makers should follow strategy for the long run. Any change in money supply leads to change in price level.

Monetarist View: According to them, government should not follow discretionary fiscal or monetary policy. It is because such policy will make the situation even worse, the real GDP will grow steadily without any inflationary pressure if the money supply grows steadily in an economy.

Modern Consensus: Both monetary and fiscal policy can reduce recessionary gap. But in a situation like liquidity trap, monetary policy is ineffective. Hence, discretionary monetary policy is preferred more than discretionary fiscal policy.

Keynesian policy: According to the Keynesian policy, the government should increase expenditure or reduce tax in order to induce consumption spending by increasing disposable income. This means to follow expansionary fiscal policy which would increase aggregate demand and fill the gap.

Answer 8

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Answer 9

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Answer 10

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Answer 11

Ch. 32 - Prob. 1P Ch. 32 - Prob. 2P Ch. 32 - Prob. 3P Ch. 32 - Prob. 4P Ch. 32 - Prob. 5P Ch. 32 - Prob. 6P Ch. 32 - Prob. 7P Ch. 32 - Prob. 8P Ch. 32 - Prob. 9P

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Chapter 32 Solutions