Which of the following policy recommendations are consistent...

Which of the following policy recommendations are consistent with the classical, Keynesian, monetarist, and/or Great Moderation consensus views of the macroeconomy? a. Since the long-run growth of GDP is $2 \%$, the money supply should grow at $2 \%$ b. Decrease government spending in order to decrease inflationary pressure. c. Increase the money supply in order to alleviate a recessionary gap. d. Always maintain a balanced budget. e. Decrease the budget deficit as a percent of GDP when facing a recessionary gap.

Which of the following policy recommendations are consistent with the classical, Keynesian, monetarist, and/or Great Moderation consensus views of the macroeconomy?
a. Since the long-run growth of GDP is $2 \%$, the money supply should grow at $2 \%$
b. Decrease government spending in order to decrease inflationary pressure.
c. Increase the money supply in order to alleviate a recessionary gap.
d. Always maintain a balanced budget.
e. Decrease the budget deficit as a percent of GDP when facing a recessionary gap.

Key Concepts

Classical Macroeconomics

Classical macroeconomics is based on the idea that markets naturally clear, and that in the long run the economy tends toward full employment. This school of thought emphasizes the importance of supply-side factors and posits that money is neutral in the long run, meaning that changes in the money supply affect nominal variables but not real quantities. Policies in this framework favor minimal government intervention, relying instead on flexible prices and wages to adjust to economic shocks.

Keynesian Economics

Keynesian economics focuses on the short-run fluctuations in the economy and places a strong emphasis on the role of aggregate demand in influencing output and employment. It advocates for active fiscal policy, particularly government spending and taxation adjustments, to stabilize the economy during periods of economic downturn or overheating. In this view, intervention is necessary because markets do not always self-correct quickly, leading to prolonged periods of unemployment or inflation.

Monetarist Economics

Monetarist economics centers on the role of governments in controlling the amount of money in circulation. Monetarists believe that variations in the money supply have major influences on national output in the short run and the price level over the long run. They advocate for a rule-based approach to monetary policy, arguing that steady, predictable growth in the money supply, aligned with long-run GDP growth, can promote economic stability and control inflation.

Great Moderation

The Great Moderation refers to a period of reduced macroeconomic volatility, particularly in terms of fluctuations in output and inflation, that many advanced economies experienced from the mid-1980s to 2007. This period is associated with improved monetary policies, better management of economic cycles, and enhanced credibility of central banks. The consensus view during this period tended to support policy recommendations that emphasize stability through sound monetary management and, to some extent, fiscal discipline.

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