Classical macroeconomics theory concludes that ultimately
A. Fiscal policy generates only quantity effects
B. erratic investment causes long business cycles
C. Functional finance cures excessive budget deficits
D. Natural state of the economy is at full employment
To determine the correct answer, let's analyze each option and understand the underlying concepts:
A. Fiscal policy generates only quantity effects: Fiscal policy refers to the use of government spending and taxation to influence the overall state of the economy. According to classical macroeconomic theory, fiscal policy can impact the quantity of goods and services produced in the economy. However, this answer is not widely accepted because fiscal policy can also have other effects, such as impacting aggregate demand, employment, and inflation.
B. Erratic investment causes long business cycles: Business cycles refer to fluctuations in economic activity, characterized by alternating periods of expansion and recession. While investment is an important component of economic growth, "erratic" investment alone is not typically considered the sole cause of long business cycles. Business cycles are influenced by a range of factors, including changes in consumer spending, government policies, technological developments, and global economic conditions.
C. Functional finance cures excessive budget deficits: Functional finance is an approach to fiscal policy that focuses on achieving specific economic outcomes rather than merely maintaining budget deficits or surpluses. It emphasizes the role of government spending and taxation in achieving economic stability and full employment. While functional finance can help address excessive budget deficits, it is not the only solution, and its effectiveness depends on various other factors.
D. Natural state of the economy is at full employment: According to classical macroeconomic theory, the natural state of the economy is believed to be at full employment. This implies that, over time, any deviations from full employment should be self-correcting and tend to revert to the equilibrium level. However, this perspective has been challenged by other economic theories, such as Keynesian economics, which argue that full employment is not automatically achieved without government intervention.
Based on the classical macroeconomics perspective, the correct answer would be D. Natural state of the economy is at full employment.