Chapter 29

Question 1

At what point is the economy in equilibrium?

Answer 1

The economy is in equilibrium when aggregate supply equals aggregate demand.

Question 2

When does equilibrium occur in the short run?

Answer 2

In the short run, equilibrium occurs when aggregate demand equals short run aggregate supply.

Question 3

What is different about wages in the classical model?

In the classical model when will the economy be at long-run equilibrium?

Answer 3

In the classical model, wages are completely flexible, the economy will be in long-run equilibrium at full employment.

Question 4

What is different about wages in the Keynesian model?

When is the economy at long run equilibrium in the Keynesian model?

Answer 4

In the Keynesian model when wages are sticky downwards, the economy can be in long run equilibrium at less than full employment.

Question 5

What affect will a rise in aggregate demand have in the long and short run in the classical model?

Answer 5

In the classical model, a rise in aggregate demand will in the short run lead to an increase in both output and prices, but in the long run the rise will generate only an increase in prices.

Question 6

What affect will a rise in aggregate demand have at full employment and below full employment in the Keynesian model?

Answer 6

In the Keynesian model, a rise in aggregate demand will be purely inflationary if the economy is at full employment, but will lead to an increase in output if the economy is below full employment.

Question 7

How will a rise in long run aggregate supply affect output and prices in the classical model?
What would Keynesians argue?

Answer 7

A rise in long run aggregate supply in the classical model will both increase output and reduce prices.
Keynesians would argue that an increase in aggregate supply will have no affect on output or prices if the economy is in a slump.