Questions and Answers
According to the Keynesian perspective, increases in aggregate demand can be caused by which of the following?
Keynesian economics explains that recessions and depressions occur because the macroeconomy can quickly adjust to shifts in aggregate demand.
False
Keynes argued that the ________ was unable to keep the economy at full employment. As a result, the ________ should take an active role in managing the economy.
private sector; government
What did Keynesian economists predict when the housing market crashed in 2007?
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This type of cost is called ________ when the prices of goods and services change frequently.
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Which school of thought believes that the economy is self-regulating and always at full employment?
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From a neoclassical view, which of the following is least important?
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Neoclassical economists argue that the long run aggregate supply curve is horizontal.
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What are the main ways in which government influences aggregate demand?
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During recessionary times, it can be hard to coordinate lower wages for workers because of the ________.
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Why do neoclassical economists emphasize long-term growth over fighting recession?
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If you hear someone say, 'If you build (produce) it they will come (purchase)' you know it is a good way to describe ________.
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What type of economic viewpoint puts an emphasis on long-run economic performance?
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A rightward shift of the AD curve along the neoclassical portion of the aggregate supply curve will result in what?
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Which of the following government policies is a neoclassical response to an economic recession?
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In the neoclassical view, expansionary fiscal policy can work to raise equilibrium output in the long run.
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Which of the following factors do not shift the aggregate demand curve?
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Why is the software company owner making decisions for the long-run despite the recent recession?
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How does the intermediate zone of the AS curve follow Say's Law when AS shifts to the right?
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What is a true statement about Say's Law in the neoclassical zone?
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What is the best explanation for the slope of the Keynesian zone of the aggregate supply curve?
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Keynes understood that in the short-run wages and prices are ________ and therefore encouraged the use of ________ to return an economy to equilibrium as needed.
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Study Notes
Keynesian Economics
- Increases in aggregate demand can stem from heightened foreign demand for U.S. products.
- Recessions and depressions arise due to the macroeconomy’s sluggish adjustment to aggregate demand shifts caused by sticky wages.
- Keynes asserted that the private sector fails to achieve full employment, necessitating government intervention in economic management.
- During economic downturns, such as the 2007 housing market crash, a decline in household wealth leads to decreased consumption expenditure.
- Short-term price fluctuations can confuse consumers and incur costs for businesses, known as menu costs.
Neoclassical Economics
- The neoclassical perspective maintains that the economy is self-regulating and consistently achieves full employment.
- Increasing aggregate demand is considered least significant from a neoclassical standpoint.
- Neoclassical economists view the long-run aggregate supply curve as vertical.
- Government influences on aggregate demand primarily occur through alterations in spending and tax rates.
- Coordinating lower wages during recessions is challenging due to the coordination argument.
- Emphasis is placed on long-term growth over recession management because recessions are temporary and the economy self-adjusts.
Economic Theories and Principles
- Say's Law posits that production inherently creates demand, exemplified by the phrase, "If you build it, they will come."
- The neoclassical viewpoint prioritizes long-term economic performance over short-term fluctuations.
- A rightward shift in the aggregate demand curve in the neoclassical zone results in an increased price level with little impact on output.
- Neoclassical policies during recessions might involve diminishing the influence of labor unions.
- Expansionary fiscal policies are ineffective for long-term output increases in a neoclassical framework due to flexible price mechanisms.
Intermediate and Aggregate Supply Considerations
- Factors that do not shift the aggregate demand curve include increases in the price level.
- Adaptive expectation reasoning drives business owners to prepare long-term strategies despite current economic challenges, anticipating future recovery.
- In the intermediate zone, Say’s Law asserts that rightward shifts of the aggregate supply curve result in equilibrium movements towards potential GDP, elevating the price level more than actual GDP.
- In the neoclassical zone, shifts in the aggregate demand curve have minimal effects on GDP since the long-run aggregate supply is aligned with potential output.
- The slope of the Keynesian zone suggests that increases in aggregate demand, while operating below potential output, foster real output growth with minimal price level impact.
- Keynes recognized that in the short run, wages and prices are inflexible and recommended fiscal measures to restore economic equilibrium as necessary.
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Description
Test your knowledge on Keynesian and Neoclassical economics with these flashcards. Learn key concepts such as aggregate demand, recession causes, and economic adjustments. Perfect for economics students or anyone interested in understanding these important economic theories.