which of the following government policies is the new classical response to an economic recession? a....

which of the following government policies is the new classical response to an economic recession?

a. adjust the minimum wage higher

b. terminating labor unions

c. increase in government spending

Solutions

Expert Solution

The correct answer is terminating labor unions. This is because New Classicals believed in the market forces for automatically adjusting in the economy. Accordingly, labir unions will lead to higher negotiation of wages which means wage rate will be higher than the equilibrium level. New Classicals believe that higher wage rate will cause producers to lay off workers and hence there will be lesser production. If the labor unions are removed, the wage rate will go down, more workers will be employed and the output will rise.

The other options are incorrect because adjusting the minimum wage higher will generate the effect opposite to what is required in dealing with recession. It will increase unemployment and will lead to lesser profit level

Increase in government spending will not be effective in recession because of the rational expectations formed by individuals and the policy ineffectiveness proposed by the New Classicals.

Rahul Sunny answered 1 month ago

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