Keynesian and Neoclassical Economics Flashcards

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Questions and Answers

According to the Keynesian perspective, increases in aggregate demand can be caused by which of the following?

An increase in foreign demand for U.S. products (correct)

A decrease in consumer spending

A rise in unemployment

A reduction in government spending

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?

A decrease in consumption expenditure, as household wealth declined. Signup and view all the answers

This type of cost is called ________ when the prices of goods and services change frequently.

menu cost Signup and view all the answers

Which school of thought believes that the economy is self-regulating and always at full employment?

Neoclassical Signup and view all the answers

From a neoclassical view, which of the following is least important?

Increasing aggregate demand to fight unemployment. Signup and view all the answers

Neoclassical economists argue that the long run aggregate supply curve is horizontal.

False Signup and view all the answers

What are the main ways in which government influences aggregate demand?

Changing government spending or tax rates. Signup and view all the answers

During recessionary times, it can be hard to coordinate lower wages for workers because of the ________.

coordination argument Signup and view all the answers

Why do neoclassical economists emphasize long-term growth over fighting recession?

Because recessions are short-lived and the economy is self-adjusting; only the long run matters. Signup and view all the answers

If you hear someone say, 'If you build (produce) it they will come (purchase)' you know it is a good way to describe ________.

Say's Law Signup and view all the answers

What type of economic viewpoint puts an emphasis on long-run economic performance?

Neoclassical Signup and view all the answers

A rightward shift of the AD curve along the neoclassical portion of the aggregate supply curve will result in what?

An increase in the price level. Signup and view all the answers

Which of the following government policies is a neoclassical response to an economic recession?

Reducing the power of labor unions. Signup and view all the answers

In the neoclassical view, expansionary fiscal policy can work to raise equilibrium output in the long run.

False Signup and view all the answers

Which of the following factors do not shift the aggregate demand curve?

An increase in the price level. Signup and view all the answers

Why is the software company owner making decisions for the long-run despite the recent recession?

The owner is using adaptive expectation reasoning to change important aspects of the company to be ready for future demands as the long-term economy shifts. Signup and view all the answers

How does the intermediate zone of the AS curve follow Say's Law when AS shifts to the right?

Equilibrium moves along the SRAS closer to potential GDP and increases the price level more than it increases real GDP. Signup and view all the answers

What is a true statement about Say's Law in the neoclassical zone?

Shifts of the AD curve have little to no effect on GDP because the LRAS is at potential. Signup and view all the answers

What is the best explanation for the slope of the Keynesian zone of the aggregate supply curve?

An increase in aggregate demand when the economy is operating below potential output causes real output to grow, with little or no effect on the price level. Signup and view all the answers

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.

sticky; fiscal policy Signup and view all the answers

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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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.