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Macroeconomics

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Classical Economics: Policies in a Depression

MACRO-OVHZSY

Suppose the country of Voluptas has just experienced a significant financial crisis. As a result, economic activity has plummeted and many economists claimed the country is now in a depression. The current government is being advised by a group of economists who firmly believe in the classical concept of laissez-faire. Which one of the following policies would likely be implemented in Voluptas to help the economy return to its long-run level of output and employment?

A

The government would immediately increase spending on infrastructure projects and borrow heavily to raise the requisite funds.

B

The government would encourage its central bank to increase the money supply in order to stimulate real variables such as output and employment.

C

The government would immediately raise income taxes in order to double the amount of unemployment insurance payments and extend the length of eligibility by one year.

D

The government would not intervene directly and would reassure its citizens that the economy is self-correcting and that any efforts it makes to intervene would result in a lower long-run level of economic activity​.