Questions and Answers
What is the Classical view of the economy characterized by?
When did the Classical approach dominate economic policy?
According to Say's Law, all goods produced will be sold if prices are flexible and free to change.
True
Keynesian theory became important in response to prolonged periods of?
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According to the real balances effect, when the price level falls, what happens to cash and consumer behavior?
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Why is the aggregate supply curve positively sloped?
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At macro equilibrium, what do aggregate demand and aggregate supply equal?
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Which of the following is likely to cause a leftward shift in the aggregate supply curve, ceteris paribus?
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If the stock market plunged over the next week, what would consumers likely do?
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What mechanism did Keynes advocate for dealing with depression in output?
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According to monetary theories, what does an increase in the money supply do to the aggregate demand curve?
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What are Keynesian policy levers primarily focused on?
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Policy levers and external shocks are determinants of macroeconomic performance.
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According to Keynes, the economy is inherently stable and does not require government intervention.
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The quantity of real output supplied rises with the price level because profits are higher.
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If the aggregate quantity supplied exceeds the aggregate quantity demanded, the price level will tend to rise.
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Most modern economists believe the economy performs best without government intervention.
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Study Notes
Classical Economic View
- Characterized by a laissez-faire approach, believing in market stability prior to the 1930s.
- Dominated economic policy before the Great Depression.
Say's Law
- All goods produced will be sold if prices are flexible and freely changeable.
- Buyers and sellers must find an acceptable price for transactions.
Keynesian Theory
- Gained importance during prolonged deflation and high unemployment in the 1930s.
- Classical theory failed to address unprecedented unemployment and wage deflation.
Real Balances Effect
- A fall in the price level increases the value of cash, which encourages increased consumer spending.
- Higher real income and wealth lead to greater demand for goods and services.
Aggregate Supply Curve
- Positively sloped due to increasing profit margins as the price level rises.
- Many production costs remain constant in the short run, encouraging greater supply at higher prices.
Macroeconomic Equilibrium
- Occurs when aggregate demand equals aggregate supply.
- Represents a unique balance between the price level and output reflecting buyer and seller intentions.
Leftward Shift in Aggregate Supply
- Increase in costs, such as natural gas, can cause a leftward shift in the aggregate supply curve.
- Higher production costs reduce producers' willingness to supply at existing prices.
Consumer Behavior
- A stock market plunge can lead consumers to demand fewer goods and services.
- Loss of wealth may drive consumers to save more and reduce spending.
Keynesian Policy Mechanism
- Advocated for increased government expenditure to combat depressed output.
- Government spending is viewed as a means to stimulate economic recovery.
Monetary Theories
- An increase in the money supply shifts the aggregate demand curve to the right.
- Focus on controlling money and interest rates to influence overall demand.
Fiscal Policy
- Key component of Keynesian policy levers, involving government tax and spending adjustments.
- Aimed at altering economic outcomes through active government intervention.
Macroeconomic Performance Determinants
- Policy levers and external shocks significantly influence macroeconomic performance.
- Internal market forces and external factors are critical to understanding economic stability.
Keynesian Economic Stability View
- Keynes argued that the economy is inherently unstable, requiring government intervention.
- Contrasts with classical views that advocate minimal government involvement.
Output Supply and Price Level
- The quantity of real output supplied rises with price level due to increased profits.
- Higher profitability incentives encourage suppliers to increase output.
Price Level and Supply-Demand Balance
- When supply exceeds demand, the price level will decrease to eliminate surplus.
- Market forces help restore equilibrium by adjusting prices.
Modern Economist Perspectives
- Many modern economists support the use of policy levers for optimal economic performance.
- Historical evidence shows the effectiveness of various economic interventions.
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Description
Test your understanding of the Classical view of the economy and its significance prior to the Great Depression. This quiz focuses on key characteristics and the impact of Classical economics. Assess your knowledge of this influential economic approach.
