Which of the following pairs of policy and theory is it when the government run deficits to stimulate the economy in a contractionary gap?  Choose one answer. a. fiscal policy; Classical theory   b. monetary policy; Keynesian theory   c. fiscal policy; Keynesian theory   d. laissez-faire policy; Classical theory   e. laissez-faire policy; Keynesian theory

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The correct answer here is C.  None of the others is close to being right.

When the government runs deficits, it is because of fiscal policy.  Fiscal policy is the use of government spending and taxation powers.  Running a deficit consists of spending more than is taken in in taxes....

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The correct answer here is C.  None of the others is close to being right.

When the government runs deficits, it is because of fiscal policy.  Fiscal policy is the use of government spending and taxation powers.  Running a deficit consists of spending more than is taken in in taxes.  Therefore, running a deficit is fiscal policy.  That means only A and C could be right.  But A is wrong because classical economics does not approve of government interventions in the economy.  Classical economics says a contractionary gap will close on its own without the government doing anything.

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