Chapter 13: Neoclassical Perspective

Question 1

Does Keynesian Economics focus on the long term or short term?

Answer 1

Short Term

Question 2

Does Neoclassical Economics focus on the long term or short term?

Answer 2

Long Term

Question 3

2 Building Blocks of Neoclassical Economics

Answer 3

1. Size of economy determined by potential GDP

2. Wages and prices adjust in a flexible manner, so economy adjusts back to potential GDP level of output

Question 4

Potential GDP

Answer 4

Level of output that can be achieved when all resources (land, labor, capital, and entrepreneurial ability) are fully employed

Question 5

Full Employment

Answer 5

Refers to no cyclical unemployment. There will be structural and frictional unemployment.

Question 6

Does neoclassical economics view prices and wages as sticky or flexible?

Answer 6

Flexible

Question 7

Rational Expectations

Answer 7

People form the most accurate possible expectations about the future as they can, using all information available to them. Economic adjustments may happen quickly. Looks to the future.

Question 8

Adaptive Expectations

Answer 8

People look at past experience and gradually adapt beliefs and behavior as circumstances change. Economic adjustments happen slowly. Looks to the past.

Question 9

What does the Neoclassical long-run aggregate supply curve show for the Phillips Curve?

Answer 9

Vertical

No long run tradeoff between inflation and unemployment

Question 10

What do neoclassical economists think government policy should focus on?

Answer 10

Long-run productivity growth through investment in human capital, physical capital, and technology. Government should focus on promoting these factors.