Question

1. Very severe economic depressions are typically associated with inflation.

a-true

b- false

2. Fiscal stimulus is more effective if the crowding-out effect is weak and if the new spending is deficit financed.

a-true

b-false

3.Irving Fisher, like the other new classical economists, did not think that central banks should intervene in the financial sector during severe economic downturns. Rather, he thought an uninterrupted process of liquidation would allow the economy to self-correct.

a-true

b-false

Answer 1

1. One of the greatest depressions of all times was the The Great Depression which saw negative inflation in the economy. There is no certain evidence that the ultimate cause of a depression is 'inflation' only.

Inflation is one of the indicators of an upcoming turmoil, but there are others significant factors which cannot be ignored that stress confidence of the society in the system to control the faults (which might be occurring in stock markets, might be due to rising oil prices globally etc.).

Correct Answer : b. False

2. Deficit financing is done through issue of government bonds to the public to fund government expenditures. This method to raise money is faulty since it causes the interest rates to increase, causing private investments to crowd out. But with a weak crowding out effect, there is less fear of losing out on productive investments. Therefore, the stimulus is at a position where it can work effectively without much fear of causing stress in the economy.

Correct Answer : a. True

3. Irving Fisher's views central bank's role as a major factor to alter interest rates to bring about required changes in inflation. This is termed as Neo-Fisherism. The central bank can change interest rates to reach the required inflation target. thus, it is in contrast to what the classicals believed.

Correct Answer : b. False