Economics Exam 3 Chapter 15 Flashcards
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Questions and Answers

Which of the following schools of thought stressed on a fixed-price model for macroeconomic equilibrium?

  • Monetarists
  • Traditional Keynesians (correct)
  • New Keynesians
  • Classical economists

    • In traditional Keynesian economics, what is the shape of the aggregate supply curve?

    horizontal

    What is the impact of an increase in aggregate expenditure on the aggregate demand curve and real GDP in the fixed-price Keynesian model?

    The aggregate demand curve would shift rightward and real GDP would increase.

    _____ school of thought would most likely be associated with the statement: 'When wages are rigid, changes in output result in small changes in goods market prices and a relatively flat aggregate supply curve.'

    <p>The traditional Keynesian</p> Signup and view all the answers

    Which of the following thoughts do the Keynesian and the new Keynesian economists share?

    <p>Wages and prices are not flexible in the short run</p> Signup and view all the answers

    What determines equilibrium real GDP in the simple Keynesian model?

    <p>Changes in aggregate demand</p> Signup and view all the answers

    If the traditional Keynesian views are accurate, what would happen to the equilibrium level of real GDP if government spending increases?

    <p>Increase the equilibrium level of real GDP.</p> Signup and view all the answers

    Which of the following schools of thought reject the simple fixed-price model?

    <p>New Keynesian economists</p> Signup and view all the answers

    Why do new Keynesians believe the economy is not always in equilibrium?

    <p>Wage and price rigidities exist.</p> Signup and view all the answers

    What explains the phenomenon of wage rigidities?

    <p>Inflexible long-term contracts</p> Signup and view all the answers

    What do new Keynesian economists believe about the flexibility of wages and prices?

    <p>Wages and prices are not flexible in the short run.</p> Signup and view all the answers

    According to new Keynesian economics, how does the aggregate supply curve behave at different levels of real GDP?

    <p>The aggregate supply curve is positively sloped at relatively low levels of real GDP and becomes horizontal as industries reach full capacity.</p> Signup and view all the answers

    What did traditional Keynesian economists believe regarding government intervention in the economy?

    <p>The government should take an active role in the economy to restore equilibrium.</p> Signup and view all the answers

    Which school of thought is associated with the statement about the need for stimulating aggregate demand through government action?

    <p>Keynesian economics</p> Signup and view all the answers

    According to traditional Keynesians, what effect will expansionary fiscal and monetary policy have?

    <p>Stimulate both consumption and investment spending, thereby increasing aggregate demand.</p> Signup and view all the answers

    According to new Keynesians, what can aggregate supply shocks lead to?

    <p>Economic instability.</p> Signup and view all the answers

    Who is considered the leading proponent of the monetarist theory?

    <p>Milton Friedman</p> Signup and view all the answers

    Which of the following schools of thought emphasizes the role of money supply in determining equilibrium real GDP and price level?

    <p>Monetarist economics</p> Signup and view all the answers

    According to monetarists, what is the relationship between government intervention and the economy?

    <p>Deliberate government intervention will destabilize the economy.</p> Signup and view all the answers

    What trade-off do monetarists suggest exists in regards to unemployment and inflation?

    <p>There is a trade-off between unemployment and inflation.</p> Signup and view all the answers

    What do monetarists believe about discretionary monetary policy?

    <p>It cannot effectively achieve goals of economic growth and low inflation.</p> Signup and view all the answers

    Milton Friedman discussed the importance of _____, rather than _____, to understand consumer spending.

    <p>permanent income; current income</p> Signup and view all the answers

    According to monetarists, what impact do changes in monetary policy have on real GDP?

    <p>Only short-term effect on real GDP.</p> Signup and view all the answers

    Which economists have faith in the free market system that leads them to favor minimal government intervention?

    <p>Monetarist economists</p> Signup and view all the answers

    What does the recognition lag refer to?

    <p>The time taken by policymakers to recognize that an economic problem exists.</p> Signup and view all the answers

    The time it takes for a particular monetary policy to change income is called the _____.

    <p>effect lag</p> Signup and view all the answers

    What was the dramatic reduction of the money supply during the 1930s responsible for?

    <p>The Great Depression.</p> Signup and view all the answers

    What is the main difference between new Keynesian economics and monetarists?

    <p>Monetarists reject the idea that government intervention can stabilize the economy, whereas new Keynesians support this notion.</p> Signup and view all the answers

    What do monetarists believe regarding the impact of government intervention on the economy?

    <p>It may do more harm than good due to long and variable lags.</p> Signup and view all the answers

    The school of thought that assumes real GDP is determined by aggregate supply, whereas the equilibrium price level is determined by aggregate demand is known as _____

    <p>classical economics</p> Signup and view all the answers

    What happens in the classical model when there is an increase in aggregate expenditure?

    <p>Shift the aggregate demand curve upward leading to an increase in prices and no change in real GDP.</p> Signup and view all the answers

    _____ is the theory that was popular before _____ changed the face of economics post Great Depression in the 1930s.

    <p>Classical economics; Keynes</p> Signup and view all the answers

    Which of the following is true of the classical model?

    <p>An increase in aggregate demand increases the price level, output remaining unchanged.</p> Signup and view all the answers

    What was the main reason why the traditional classical school ceased to be widely accepted?

    <p>It could not explain the persistence of high levels of unemployment seen during the Great Depression.</p> Signup and view all the answers

    What do traditional classical economists believe about wage rates?

    <p>Wage rates are perfectly flexible.</p> Signup and view all the answers

    According to classical economics, what determines real GDP and the equilibrium price level?

    <p>Real GDP is determined by aggregate supply, while the equilibrium price level is determined by aggregate demand.</p> Signup and view all the answers

    The _____ aggregate supply curve assumed by classical economists means that the equilibrium level of _____ is determined only by the aggregate supply curve.

    <p>vertical; output</p> Signup and view all the answers

    Which economist would likely say, 'An increase in government expenditure will only increase inflation because the aggregate supply curve is vertical'?

    <p>An economist from traditional classical economics.</p> Signup and view all the answers

    Which economic theory takes into account the rational expectations of people in the economy?

    <p>New classical economics</p> Signup and view all the answers

    What does the new classical school hold about unemployment?

    <p>Unemployment is only temporary, because the economy tends naturally toward equilibrium.</p> Signup and view all the answers

    What is the basis of the monetarist assumption that monetary policy cannot change long-run equilibrium income?

    <p>The long-run Phillips curve is vertical.</p> Signup and view all the answers

    According to the new classical school of economics, how does the aggregate supply curve behave?

    <p>Upward-sloping in the short run and vertical in the long run.</p> Signup and view all the answers

    What do new classical economists believe about an unexpected increase in the money supply?

    <p>It will reduce the unemployment rate in the short run.</p> Signup and view all the answers

    Which of the following is the basic tenet of new classical economics?

    <p>A change in monetary policy affects the equilibrium level of real GDP only if those changes are unexpected</p> Signup and view all the answers

    According to which school of thought does a change in monetary policy affect the equilibrium level of real GDP only if those changes are unexpected?

    <p>New classical economics</p> Signup and view all the answers

    Which of the following statements accurately expresses the assumptions on which new Keynesian and new classical theory are based?

    <p>New Keynesian economics assumes that the economy can reach equilibrium below the natural rate of unemployment, whereas new classical economics assumes that macroeconomic equilibrium is always at the natural rate of unemployment.</p> Signup and view all the answers

    Which schools of thought believe that wages and prices are rigid in the short run?

    <p>Keynesians and new Keynesians</p> Signup and view all the answers

    Which of the following economic theories favors an active role for government in promoting low inflation and economic growth?

    <p>New Keynesian economics</p> Signup and view all the answers

    According to the Keynesian school of thought, the economy is not self-regulating.

    <p>True</p> Signup and view all the answers

    Traditional Keynesian economics assumes that prices are relatively flexible in response to changes in aggregate expenditures.

    <p>False</p> Signup and view all the answers

    Traditional Keynesians would argue that fluctuations in aggregate demand are closely tied to fluctuations in investment.

    <p>True</p> Signup and view all the answers

    Keynesian economists today favor a model in which the aggregate supply curve is relatively flat at low levels of real GDP and slopes downward as real GDP approaches its potential level.

    <p>False</p> Signup and view all the answers

    New Keynesians argue that a decrease in government spending reduces inflation.

    <p>True</p> Signup and view all the answers

    Milton Friedman is widely considered to be the father of monetarism.

    <p>True</p> Signup and view all the answers

    Monetarists would argue that in the short run, increases in the money supply act to raise both investment and consumption, while also increasing the price level.

    <p>True</p> Signup and view all the answers

    According to the monetarists, inflation is primarily caused by an increase in the money supply.

    <p>True</p> Signup and view all the answers

    According to monetarists, changes in the money supply have long-lasting effects on the equilibrium level of real GDP.

    <p>False</p> Signup and view all the answers

    According to the monetarists, government intervention can stabilize the economy and minimize the effect of business cycles.

    <p>False</p> Signup and view all the answers

    Monetarists argue that government actions, particularly monetary policy, worsen the negative aspects of the business cycle.

    <p>True</p> Signup and view all the answers

    Agreeing with Keynesian economists, monetarists believe that the economy is subject to disequilibrium that must be corrected by government action.

    <p>False</p> Signup and view all the answers

    The effect lag occurs because it takes policymakers some time to recognize that a problem exists in an economy.

    <p>False</p> Signup and view all the answers

    Reaction lag is the term used to express the fact that some time passes before changes in the money supply are properly translated into changes in real GDP.

    <p>False</p> Signup and view all the answers

    Monetarists believe that discretionary monetary policy should be used to correct disequilibrium.

    <p>False</p> Signup and view all the answers

    New classical economics assumes that government has direct control over the equilibrium level of GDP and indirect control over the money supply.

    <p>False</p> Signup and view all the answers

    According to the traditional classical school of thought, aggregate supply is vertical both in the short run and in the long run.

    <p>True</p> Signup and view all the answers

    The assumption of wage and price flexibility leads classical economists to conclude that business cycle fluctuations are short-term in nature.

    <p>True</p> Signup and view all the answers

    New classical economists believe that wages are inflexible.

    <p>False</p> Signup and view all the answers

    The new classical school of thought is usually associated with the theory of rational expectations.

    <p>True</p> Signup and view all the answers

    New classical economists contend that both the short-run and long-run aggregate supply curves are vertical.

    <p>False</p> Signup and view all the answers

    Monetarists and new classical economists favor an active role of government in promoting low inflation and economic growth.

    <p>False</p> Signup and view all the answers

    New classical economists advocate less government intervention than the new Keynesian school of thought.

    <p>True</p> Signup and view all the answers

    Both new classical economists and monetarists disagree with Keynesians about the optimal degree of involvement of the government in determining the equilibrium level of real GDP.

    <p>True</p> Signup and view all the answers

    Study Notes

    Traditional Keynesian Economics

    • Stresses a fixed-price model, implying a horizontal aggregate supply curve.
    • An increase in aggregate expenditure shifts the aggregate demand curve rightward, increasing real GDP.
    • Believes wages are rigid, leading to small changes in prices and a flat aggregate supply curve.
    • Advocates for active government intervention to restore economic equilibrium.
    • Economic equilibrium is determined by changes in aggregate demand.

    New Keynesian Economics

    • Rejects the simple fixed-price model, favoring a positively sloped aggregate supply curve at low GDP levels.
    • Acknowledges wage and price rigidities as reasons for the economy not always being in equilibrium.
    • Supports the idea that government intervention is necessary to stabilize the economy.
    • Describes that the aggregate supply curve becomes horizontal as industries reach full capacity.

    Monetarist Economics

    • Led by Milton Friedman; emphasizes the role of money supply in determining real GDP and price levels.
    • Argues that deliberate government intervention destabilizes the economy and can create its own business cycles.
    • Claims there’s a tradeoff between inflation and unemployment.
    • Believes that changes in monetary policy only have short-term effects on real GDP.
    • Rejects discretionary monetary policy, advocating for a steady increase in money supply.

    Classical Economics

    • Assumes real GDP is determined by aggregate supply, while the equilibrium price level is determined by aggregate demand.
    • Believes in perfectly flexible wage rates and argues an increase in aggregate demand only raises prices, not output.
    • Fails to explain prolonged unemployment during the Great Depression, reducing its acceptance.

    New Classical Economics

    • Incorporates rational expectations, suggesting unemployment is temporary as the economy seeks equilibrium.
    • Asserts that unexpected changes in monetary policy can affect real GDP.
    • States that both short-run and long-run aggregate supply curves can be vertical, indicating no trade-off between inflation and unemployment in the long run.

    Key Differences Between Schools of Thought

    • New Keynesians and Keynesians believe in wage and price rigidity, unlike classical and new classical economists.
    • Monetarists and new classical economists advocate less government intervention compared to new Keynesians.
    • Both new classical and monetarist schools challenge the effectiveness of government policies in correcting economic disequilibrium.

    Additional Concepts

    • Recognition lag is the time taken for policymakers to identify economic issues.
    • Effect lag refers to the time it takes for policy changes to impact real GDP.
    • Reaction lag describes the delay between monetary supply changes and real GDP adjustments.

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    Description

    Test your knowledge of Chapter 15 from your Economics course with these flashcards. This quiz covers key concepts of Traditional Keynesian economics, including price models and the effects of aggregate expenditure on the economy. Perfect for exam preparation!

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