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    Macroeconomics: Debt, Policy, Cuts

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    1) What did classical economists assume about flexibility of prices, wages and interest rates? What did this assumption imply about the self correcting tendencies in an economy recession? What disagreements did Keynes have with classical economists? (evolution of fiscal policy)
    2) Increased government purchases with taxes held constant can eliminate a recessionary gap. How could tax cuts achieve the same result?
    3) Why does the budget require a forecast of the economy? Under what circumstances would actual government spending and tax revenue fail to match the budget as approved? (federal budget cuts)
    4) What has happened to the federal debt since 2008 as measured relative to GDP? (federal debt)

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    Solution Preview

    1) According to classical economists if there is disequilibrium in the economy then in that case the economy will correct itself. This means that at a time of recession a reduction in output and employment of the economy would lead to a reduction in prices and increase in consumer spending. Apart from this reduction in employment will make the wages decreases and this in turn will decrease unemployment. There will be decline in interest rate and this will expand ...

    Solution Summary

    This solution answer questions related with macroeconomics such as price flexibility, wages, interest rates, and budget cuts.