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Questions and Answers
Classical economists believed that government should manage the economy.
Classical economists believed that government should manage the economy.
False
When the economy is in an inflationary gap, the labor market is experiencing a _____________.
When the economy is in an inflationary gap, the labor market is experiencing a _____________.
shortage
In a self-regulating economy, wage rates will then ___________ and the ______________ curve will shift __________________.
In a self-regulating economy, wage rates will then ___________ and the ______________ curve will shift __________________.
rise; SRAS; leftward
What do classical economists argue about saving and investment?
What do classical economists argue about saving and investment?
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According to classical economists, the economy always operates close to or on its institutional PPF.
According to classical economists, the economy always operates close to or on its institutional PPF.
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If the economy is in short-run equilibrium at point A, the (actual) unemployment rate is greater than the natural unemployment rate.
If the economy is in short-run equilibrium at point A, the (actual) unemployment rate is greater than the natural unemployment rate.
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What is the current unemployment rate if the structural unemployment rate is 3.1 percent, the frictional unemployment rate is 2.1 percent, and the current unemployment rate is 6.0 percent?
What is the current unemployment rate if the structural unemployment rate is 3.1 percent, the frictional unemployment rate is 2.1 percent, and the current unemployment rate is 6.0 percent?
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What does classical economics refer to?
What does classical economics refer to?
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Which point is representative of the economy experiencing labor market surpluses according to Exhibit 9-7?
Which point is representative of the economy experiencing labor market surpluses according to Exhibit 9-7?
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What follows if the economy is self-regulating?
What follows if the economy is self-regulating?
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When there is an inflationary gap, (actual) Real GDP is __________ Natural Real GDP.
When there is an inflationary gap, (actual) Real GDP is __________ Natural Real GDP.
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The (actual) unemployment rate is __________ the natural rate of unemployment.
The (actual) unemployment rate is __________ the natural rate of unemployment.
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If the economy is self-regulating and the (actual) unemployment rate is less than the natural unemployment rate, what does it mean?
If the economy is self-regulating and the (actual) unemployment rate is less than the natural unemployment rate, what does it mean?
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What does it indicate if the natural unemployment rate is 5.5 percent?
What does it indicate if the natural unemployment rate is 5.5 percent?
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When the economy is in a recessionary gap, the labor market is experiencing a _____________.
When the economy is in a recessionary gap, the labor market is experiencing a _____________.
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In a self-regulating economy, wage rates will then ___________ and the ______________ curve will shift __________________.
In a self-regulating economy, wage rates will then ___________ and the ______________ curve will shift __________________.
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If the economy is self-regulating and is currently at point 1, what follows?
If the economy is self-regulating and is currently at point 1, what follows?
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The classical economists felt that wages and prices were flexible in both the upward and downward directions.
The classical economists felt that wages and prices were flexible in both the upward and downward directions.
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What is the relationship between the amount of funds firms invest and the interest rate according to classical economists?
What is the relationship between the amount of funds firms invest and the interest rate according to classical economists?
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When the economy is at its full employment Real GDP, what is the unemployment rate equal to?
When the economy is at its full employment Real GDP, what is the unemployment rate equal to?
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What shape does the long-run aggregate supply (LRAS) curve take?
What shape does the long-run aggregate supply (LRAS) curve take?
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What do the unemployment rates indicate if the structural unemployment rate is 2.3 percent, the frictional unemployment rate is 2.4 percent, and the current unemployment rate is 4.1 percent?
What do the unemployment rates indicate if the structural unemployment rate is 2.3 percent, the frictional unemployment rate is 2.4 percent, and the current unemployment rate is 4.1 percent?
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What happens if an economy's institutional production possibilities frontier (institutional PPF) shifts rightward?
What happens if an economy's institutional production possibilities frontier (institutional PPF) shifts rightward?
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According to classical economists, what is the relationship between the amount of funds households plan to save and the interest rate?
According to classical economists, what is the relationship between the amount of funds households plan to save and the interest rate?
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If the economy is producing Natural Real GDP, then what can be concluded?
If the economy is producing Natural Real GDP, then what can be concluded?
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According to Say's law, what can be said about goods production?
According to Say's law, what can be said about goods production?
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Study Notes
Classical Economics
- Classical economists believed that government intervention in the economy is unnecessary for effective management.
- The classical view emphasizes that the economy operates close to or on its production possibilities frontier (PPF).
- Classical economics spanned from approximately 1750 to the early 1900s.
Labor Market Dynamics
- An inflationary gap leads to a shortage in the labor market, causing wage rates to rise and the short-run aggregate supply (SRAS) curve to shift leftward.
- Conversely, in a recessionary gap, there is a surplus in the labor market; wage rates fall, shifting the SRAS curve rightward.
Unemployment Rates
- Structural unemployment is typically stable, while frictional unemployment accounts for normal labor market turnover.
- An actual unemployment rate of 6.0% (with structural at 3.1% and frictional at 2.1%) indicates a recessionary gap, producing below natural Real GDP.
- Full employment occurs when the actual unemployment rate matches the natural unemployment rate (e.g., 5.5%).
Economic Relationships and Flexibility
- Interest rates exhibit flexibility, adjusting to ensure saving equals investment.
- Classical economists argue that the relationship between investment funds and interest rates is inverse—higher interest rates typically lead to lower investment.
- Similarly, the relationship between household savings and interest rates is direct—higher rates encourage more savings.
Short-Run vs. Long-Run Equilibria
- In short-run equilibrium at point A, actual unemployment exceeds the natural rate, indicating inefficiencies.
- If the economy stabilizes at full employment Real GDP, actual unemployment equals the natural rate.
Aggregate Supply and Production Possibilities
- The long-run aggregate supply (LRAS) curve is vertical, indicating that output is determined by factors such as technology and resources rather than price levels.
- If the institutional PPF shifts rightward, the economy's natural unemployment rate decreases, indicating increased production capacity.
Say's Law
- According to Say's law, general overproduction or underproduction of goods is impossible, as supply creates its own demand.
Graphical Analysis
- Economic points on graph representations illustrate the conditions of the economy, such as point A representing labor market surpluses in certain contexts.
- Observations from diagrams (e.g., Exhibit 9-5 and Exhibit 9-6) depict transitions between different scenarios in labor and goods markets.
Studying That Suits You
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Description
Test your knowledge of economics with these flashcards focused on Chapter 9 material. The quiz covers classical economics, inflationary gaps, and labor market dynamics. Perfect for students looking to reinforce their understanding of economic principles.
