If, according New Classical economists, fiscal policy is inadequate because any government spending increase causes: a....

If, according New Classical economists, fiscal policy is inadequate because any government spending increase causes:

a. most households save rather than spend.

b. business to decrease their investments.

c. private individuals to spend more and save less.

Expert Solution

Option A

According to New Classical Economist a given path of government expenditure is financed through taxes or debt is unimportant. Substituting debt for taxes appears to increase disposable income today. But since the debt must be repaid with interest, a rational taxpayer would save the entire windfall in order to afford the future tax bill, leaving his expenditure unchanged.Attempts to stimulate an economy by increasing debt-financed government spending are doomed to failure because demand remains unchanged.

Rahul Sunny answered 2 years ago

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