a) The Classical Macroeconomic model suggests no need for the government to stabilize the economy using...

a) The Classical Macroeconomic model suggests no need for the government to stabilize the economy using monetary or fiscal policy. Explain this statement in the AD-AS framework.

b) Explain how the expectations and redistribution effects destabilize the economy when prices are rising.

Solutions

Expert Solution

Classical economists assume that full employment is general condition. Government should not make any intervention in economic activities, it would lead to inefficient outcomes only. Flexible price and wage rate would automatically give rise to the output level and employments. If due to any reasons, demand falls, it would again shifts to its previously level without government intervention.

Thus, if wage and prices are flexible, government should not make intervention through monetary and fiscal policies,

Marginal rise in inflation could be beneficial to economy. But when there is high rise in inflation rate, it leads to negative sentiments in economy. Investors reduce their investment for fear of losing their money. Further, income inequalities rise, and rich class converts their money into stable valued assets.

Here, government must use monetary and fiscal policies to rein in inflationary pressures.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Compare and contrast the Classical Macroeconomic Model with the Keynesian Macroeconomic Model. a. When was the...

Compare and contrast the Classical Macroeconomic Model with the Keynesian Macroeconomic Model. a. When was the Classical Macroeconomic Model Developed? b. Why was the Classical Macroeconomic Model Developed? c. Can the Classical Model explain economic fluctuations why or why not? d. Can fiscal policy increase real economic output in the Classical Model why or why not? e. Can monetary policy increase real economic output in the Classical Model why or why not? f. What assumptions does the Classical Model make...

6. Using policy to stabilize the economy The government has the ability to influence the level...

6. Using policy to stabilize the economy The government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to whether the government should attempt to stabilize the economy. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. Businesses make investment plans many months...

8. Using policy to stabilize the economy The government has the ability to influence the level...

8. Using policy to stabilize the economy The government has the ability to influence the level of output in the short run using monetary and fiscal policy. There is some disagreement as to whether the government should attempt to stabilize the economy. Which of the following are arguments in favor of active stabilization policy by the government? Check all that apply. Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses. The...

(20 PTS) Compare and contrast the Classical Macroeconomic Model with the Keynesian Macroeconomic Model. More specifically,...

(20 PTS) Compare and contrast the Classical Macroeconomic Model with the Keynesian Macroeconomic Model. More specifically, I want you to answer the following questions. a. What assumptions does the Classical Model make to arrive at this result for the impact of monetary policy? b. Can fiscal policy increase real economic output in the Keynesian Model why or why not? c. Can monetary policy increase real economic output in the Keynesian Model why or why not?

The Macroeconomic Environment Analyze the role of government in the macro economy, including government macroeconomic policies...

The Macroeconomic Environment Analyze the role of government in the macro economy, including government macroeconomic policies and the objectives on which they are based. Objectives: - Controlling inflation Economic growth, Reducing unemployment d. A favorable balance of payments e. Controlling public borrowing f. A stable exchange rates Policies: - Functions of government in the economies. Fiscal policies Monetary policy Direct controls *** Follow the assignment guidelines: - (Introduction, Discussion, Review, Suggestion, conclusion & reference) do not forget the guidelines

Classical small open economy model: According to the Classical small open economy model, what happens to...

Classical small open economy model: According to the Classical small open economy model, what happens to domestic national saving, investment, the trade balance, and the real exchange rate in response to each of the following events? Draw a loanable funds market diagram and a net exports diagram to illustrate your answer in each case. (For these diagrams, let’s assume that the country starts out running a current account surplus and capital account deficit, as in the examples in class.) a)...

illustrate the effects of an increase in government spending using the classical model assuming that money...

illustrate the effects of an increase in government spending using the classical model assuming that money supply and tax collections are fixed and the government increases its expenditure by selling bonds to the public.

Should the government use monetary and fiscal policy in an effort to stabilize the economy?

27. Use of discretionary policy to stabilize the economy Should the government use monetary and fiscal policy in an effort to stabilize the economy? The following questions address the issue of how monetary and fiscal policies affect the economy and the pros and cons of using these tools to combat economic fluctuations. The following graph shows a hypothetical aggregate demand curve (AD), short-run aggregate supply curve (AS), and long-run aggregate supply curve (LRAS) for the U.S. economy in March 2020.Suppose the government...

Should the government use monetary and fiscal policy in an effort to stabilize the economy?

Should the government use monetary and fiscal policy in an effort to stabilize the economy? The following questions address the issue of how monetary and fiscal policies affect the economy, and the pros and cons of using these tools to combat economic fluctuations.The following graph shows a hypothetical aggregate-demand (AD) curve, short-run aggregate-supply (AS) curve, and long-run aggregate-supply (LRAS) curve for the Canadian economy in March 2023.Suppose the government decides to intervene to bring the economy back to the natural...

The government has implemented fiscal and monetary policies in order to stabilize the economy as a...

The government has implemented fiscal and monetary policies in order to stabilize the economy as a result of the COVID-19 pandemic. Discuss three channels by which the government’s monetary policy actions might affect stock prices and aggregate spending. What do you think about the impact these monetary policy decisions might have on the labour market ?

Subjects