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(Solution) - Classical economists argue that using fiscal policy to fight a

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Classical economists argue that using fiscal policy to fight a recession does not make workers better off. Suppose, however, that the Keynesian model is correct. Relative to a policy of doing nothing, does an increase in government purchases that brings the economy to full employment make workers better off? In answering the question, discuss the effects of the fiscal expansion on the real wage, employment, consumption, and current and future taxes. How does your answer depend on (a) the direct benefits of the government spending program, and (b) the speed with which prices adjust in the absence of fiscal stimulus?


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This question was answered on: Jul 11, 2017

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