Chapter 11:Classical and Keynesian Terms and Quiz

Question 1

What is Say’s Law?

Answer 1

supply creates its own demand, so desired expenditures will = actual expenditures.
there can be no overproduction in a market economy and full employment will be the normal state of affairs.

Question 2

Assuptions of Classical Model

Answer 2

pure competition exists, wages and prices are flexible, people are motivated by self-interest, people cannot be fooled by money illusion

Question 3

Money Illusion

Answer 3

Reacting to changes in money prices rather than relative prices

Question 4

Classical Economics

Answer 4

Market will correct itself and any problems in macroeconomy will be temporary

Question 5

Investment

Answer 5

Refers only to additions to the nation’s capital stock

Question 6

Increased Interest Rates (Classical)

Answer 6

Imply people desire to save more

Question 7

Labor Market (Classical)

Answer 7

Increase in the quantity of labor input increases real GDP

Question 8

Equilibrium Real GDP (Keynesian)

Answer 8

Is determined by aggregate demand

Question 9

Keynesian Economics

Answer 9

Prices, (ex. cost of labor=wages) were inflexible downward due to the existence of unions and long-term contracts between businesses and workers

Question 10

What is a short-run Aggregate Supply Curve?

Answer 10

The relationship between total planned economywide production and the price level in the short run

Question 11

What causes an increase in aggregate supply?

Answer 11

new raw materials, increased competition, reduces international trade barriers, less impediments to business, increase in supply of labor, increased education, decreased marginal tax rates, reduction in input prices

Question 12

What causes a decrease in aggregate supply?

Answer 12

depletion of raw materials, decreased competition, increase in international trade barriers, more impediments to business, decrease in labor supply, decrease in education, increase in marginal tax rates, increase in input prices

Question 13

What causes aggregate demand shock?

Answer 13

any event that causes the aggregate demand curve to shift inward or outward

Question 14

What is a recessionary gap?

Answer 14

the gap that exists whenever equilibrium real GDP per year is less than full-employment real GDP as shown by the position of the LRAS curve

Question 15

What causes aggregate supply shock?

Answer 15

any event that causes the aggregate supply curve to shift inward or outwards

Question 15

What is an inflationary gap?

Answer 15

the gap exists whenever equilibrium real GDP per year is greater than full employment real GDP as shown by the position of the LRAS curve

Question 16

What is cost-push inflation?

Answer 16

inflation caused by decreases in SRAS

Question 17

what is demand-pull inflation?

Answer 17

inflation caused by increases in aggregate demand not matched by increases in aggregate supply.
arises due to increase in household income.

Question 18

deflation will occur when…

Answer 18

the AD were to decrease due to a stronger dollar

Question 19

keynesian model argues…

Answer 19

that prices are sticky. Because nominal wages are inflexible downwards. which means a decrease in AD causes firms to reduce their workforce.
Meaning full-employment is possible but not guaranteed.

Question 20

Keynesians believe that…

Answer 20

the AS curve is horizontal in the short run.

Question 21

The Classical Model assumes prices are…

Answer 21

flexible.. so that the AS curve is VERTICAL and the economy is always AT FULL EMPLOYMENT

Question 22

LRAS curve will not shift if…

Answer 22

there is a change in the price level.

Question 23

SRAS curve and the LRAS curve will shift because of…

Answer 23

increased training and education of the labor force.
decreased competition. A depletion of raw materials.

Question 24

persistent inflation arises due to

Answer 24

the AD curve increasing by a larger proportion than the LRAS curve.

Question 25

Which of the following is NOT an assumption of the classical system?
a. People are motivated by self-interest.
b. There is no money illusion.
c. Pure competition exists.
d. Wages and prices are inflexible.

Answer 25

d. Wages and prices are inflexible.

Question 26

The idea that supply creates its own demand is known as:

a. Keynes’ law.
b. Say’s law.
c. the law of supply.
d. the law of demand.

Answer 26

b. Say’s law.

Question 27

According to classical theory, full employment in the labor market occurs

a. only when the economy has just experienced a demand shock.
b. only when actual expenditures are greater than desired expenditures.
c. whenever aggregate demand is less than aggregate supply.
d. at a wage rate at which quantity demanded equals quantity supplied.

Answer 27

d. at a wage rate at which quantity demanded equals quantity supplied.

Question 28

In the classical model, real Gross Domestic Product (GDP) per year is

a. due to supply conditions plus the extent of government intervention in the economy.
b. supply determined.
c. demand determined.
d. determined by supply and demand conditions together.

Answer 28

b. supply determined.