The new classical model implies that substitution of debt for tax financing
a. increases aggregate demand and exerts an expansionary effect on real output.
b. is highly effective against inflation.
c. reduces savings because it increases both the current and future tax liability of households.
d. leaves wealth, and therefore aggregate demand, unchanged because the debt will require higher future tax rates.
D
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Refer to the figure above. What is the equilibrium employment and wage rate after the demand curve shifts to LD2?
A) 20 units of labor and $35 B) 5 units of labor and $15 C) 15 units of labor and $20 D) 10 units of labor and $10
Under a fixed exchange rate system, if the real interest rate is at its lower bound and the central bank implements expansionary policy, real GDP will ________ and the output gap will ________
A) increase; increase B) decrease; decrease C) increase; decrease D) not change; not change