Questions and Answers
Does neoclassical economics focus on the long term or the short term? Explain your answer.
long term
Does neoclassical economics view prices and wages as sticky or flexible? Why?
both sticky and flexible
What shape is the long-run aggregate supply curve? Why does it have this shape?
vertical
What is the difference between rational expectations and adaptive expectations?
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A neoclassical economist and a Keynesian economist are studying Vineland's economy. Which economist would likely advocate that the government take active measures to reverse a decline in aggregate demand? Why?
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Do neoclassical economists tend to focus more on long-term economic growth or on recessions? Explain briefly.
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Do neoclassical economists tend to focus more on cyclical unemployment or on inflation? Explain briefly.
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Do neoclassical economists see a value in tolerating a little more inflation if it brings additional economic output? Explain your answer.
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If aggregate supply is vertical, what role does aggregate demand play in determining output? In determining the price level?
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What is the shape of the neoclassical long-run Phillips curve? What assumptions do economists make that lead to this shape?
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Study Notes
Neoclassical Economics Overview
- Neoclassical economics emphasizes long-term growth over short-term fluctuations, advocating for government focus on inflation control rather than managing recessions.
- Prices and wages are viewed as both sticky (short run) and flexible (long run), allowing for adjustments over time.
Long-Run Aggregate Supply Curve
- The long-run aggregate supply (LRAS) curve is vertical; it indicates that potential output is determined by productivity rather than the price level.
Expectations Theory
- Rational expectations involve informed predictions about the future, while adaptive expectations rely on past experiences and are reactive.
Keynesian vs. Neoclassical Perspectives
- Keynesian economists support government intervention during a recession to stimulate aggregate demand, whereas neoclassical economists believe in self-correction and oppose active fiscal policies, asserting that intervention would worsen inflation rather than improve GDP.
Economic Focus Areas
- Neoclassical economists prioritize long-term economic growth over immediate concerns about recessions and cyclical unemployment, viewing short-term unemployment as a temporary issue that resolves naturally.
- They focus on controlling inflation because attempts to reduce cyclical unemployment could exacerbate inflation rates.
Aggregate Demand and Output
- With a vertical LRAS, shifts in aggregate demand do not affect overall output, which can only increase through long-term investments in physical and human capital, leading to a rightward shift in the LRAS.
Phillips Curve and Assumptions
- The neoclassical long-run Phillips curve is vertical, indicating no trade-off between inflation and unemployment; the natural unemployment rate remains unaffected by price changes.
- Key assumptions include the vertical nature of the LRAS and the idea that inflation does not influence long-run unemployment levels.
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Description
Test your understanding of neoclassical economics in this quiz based on Chapter 13. Explore concepts such as long-term growth, inflation control, and the implications of government policy on economic cycles. Perfect for students looking to reinforce their knowledge of economic theories.
