Chapter 5R, Problem 1CTQ

To determine

The theories that are discussed in the book are closest to truth or related to real-world economic phenomena.

Explanation of Solution

There are various theories of economics such as the classical approach, Neo-classical approach, Keynesian theory, etc.

Neo-Keynesian school of economics is the outcome when neo-classical, classical, and Keynesian theories failed. As per the Neo-Keynesian theory, the economy of the country can be regulated by using both monetary policy as well as fiscal policy. Each policy has its own advantages. By using these policies a real-life financial crisis was handled by the government and the Fed.

Fiscal policy is used to regulate a country’s revenue and expenses whereas monetary policy is used to look after the money demand and money supply balance. This can be done by regulating banking lending or investment activities.

Economics Concept Introduction

Federal Reserve: Federal Reserve is the central bank that is responsible for controlling the country’s financial banking system. It has a basic tool by which it can regulate the money in the market which is referred to as open market operations.