Macroeconomics Chapter 13 Flashcards

Questions and Answers

______ economists place an emphasis on run economic performance.

Neoclassical; long

In the long run, the economy seems to rebound back to its _ and its ________.

potential GDP; natural rate of unemployment

What does a vertical AS curve mean in terms of real GDP?

The level of aggregate supply will determine the real GDP of the economy, regardless of the level of aggregate demand.

In the neoclassical model, economic growth over time shifts potential GDP and the ______________ gradually to the right.

vertical AS curve Signup and view all the answers

The theory of _____________________ holds that people will use all information available to them to form the most accurate possible expectations about the future.

rational expectations Signup and view all the answers

If the ______________________ is vertical over time, then people should rationally expect this pattern.

aggregate supply curve Signup and view all the answers

What does the Keynesian view of economics assume?

Wages are sticky. Signup and view all the answers

What is likely to occur if a neoclassical model shows increasing wages in the economy over the long run?

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

If the neoclassical argument that the economy always moves back to potential GDP is accepted, what will be more important?

Encouraging long-term growth. Signup and view all the answers

What will the level of cyclical unemployment be when an economy is producing at potential GDP?

0 Signup and view all the answers

Referring to a Keynesian Phillips curve, what is likely to occur with a reduction in inflation?

At least a slight increase in unemployment. Signup and view all the answers

A typical Keynesian aggregate supply (AS) curve ___ and a typical Keynesian Phillips curve _.

slopes upward; slopes downward Signup and view all the answers

In short-run Keynesian analysis, what will a rise in aggregate demand lead to?

Lower unemployment. Signup and view all the answers

In the neoclassical view, the economy has a ___________________________ to move back to potential GDP.

self-correcting tendency Signup and view all the answers

From the neoclassical view, what will be more important if productivity growth has fallen?

The growth rate of long-term productivity. Signup and view all the answers

The ___________________ argument tends to view inflation as a cost that offers no offsetting gains in terms of lower unemployment.

neoclassical Signup and view all the answers

Which of the following is most strongly supported by the Keynesian perspective of macroeconomics?

Inflation is a price that might have to be paid to achieve lower unemployment. Signup and view all the answers

Which of the following is a building block of neoclassical economics?

Wages and prices will adjust in a flexible manner. Signup and view all the answers

Which of the following represents a Keynesian point of view of macroeconomics?

Creating increases in aggregate demand to reduce unemployment. Signup and view all the answers

The neoclassical view holds that long-term expansion of potential GDP due to ___ will determine .

economic growth; the size of the economy Signup and view all the answers

In the neoclassical version of the AD/AS model, how should you represent the AS curve?

A vertical line drawn at the level of potential GDP. Signup and view all the answers

In the neoclassical model, what causes the AS curve to shift to the right over time?

Productivity increases. Signup and view all the answers

Which of the following is a valid criticism of the rational expectations theory?

The assumption seems too strong. Signup and view all the answers

In the long-run neoclassical view, when wages and prices are flexible, what determines the size of real GDP?

Potential GDP and aggregate supply. Signup and view all the answers

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

Fighting unemployment. Signup and view all the answers

From a neoclassical perspective, which of the following would most likely be viewed as an element that underpins long-run productivity growth?

Investments in human capital. Signup and view all the answers

What must occur to shift the vertical supply curve to the left?

Breakdown of key market institutions. Signup and view all the answers

Why do neoclassical economists tend to put relatively more emphasis on long-term growth than on fighting recession?

Standard of living is ultimately determined by long-term growth. Signup and view all the answers

If aggregate supply is vertical, then aggregate demand does not affect:

The quantity of output. Signup and view all the answers

Study Notes

Neoclassical Economics

Neoclassical economists emphasize long-run economic performance, focusing on potential GDP and natural unemployment rates.
A vertical aggregate supply (AS) curve indicates real GDP is determined by potential GDP, not affected by aggregate demand levels.

Economic Growth and AS Curve

In the neoclassical model, long-term economic growth shifts potential GDP and the vertical AS curve to the right.
The theory of rational expectations suggests people utilize all available information to form accurate future expectations.

Keyneisan vs. Neoclassical Views

The Keynesian perspective assumes wages are sticky, leading to potential disparities between real GDP and potential GDP.
A neoclassical model showing increasing wages may result in a subsequent price level increase (inflation).

Employment and Inflation Dynamics

If the economy consistently returns to potential GDP, a greater emphasis is placed on encouraging long-term growth.
Cyclical unemployment will be zero when the economy produces at potential GDP.

Phillips Curve Insights

The Keynesian Phillips curve indicates that reducing inflation can lead to an increase in unemployment.
A typical Keynesian AS curve slopes upward while the Phillips curve slopes downward.

Aggregate Demand Influences

A rise in business confidence boosts investment and lowers unemployment in a short-run Keynesian analysis.
Neoclassical economics posits a self-correcting tendency for the economy to return to potential GDP.

Productivity and Economic Conditions

In scenarios of declining productivity growth, the long-term growth rate of productivity becomes crucial.
The neoclassical perspective views inflation as a cost with no compensating benefits in terms of unemployment reduction.

Building Blocks of Economic Theories

The neoclassical model asserts that wages and prices adjust flexibly, while the Keynesian view promotes increasing aggregate demand to reduce unemployment.
Long-term expansions of potential GDP, driven by economic growth, dictate the economy's size.

AS Curve Representation

In the neoclassical AD/AS model, the AS curve is represented as a vertical line at the level of potential GDP.
Productivity increases lead to rightward shifts in the AS curve over time.

Theories and Criticisms

A notable critique of rational expectations theory is the strength of its assumptions.
In the long run, real GDP size is determined by potential GDP and aggregate supply, particularly when wages and prices are flexible.

Economic Priorities

From a neoclassical standpoint, combating unemployment is less critical compared to supporting long-term growth.
Investments in human capital are viewed as vital for sustaining long-run productivity growth.

Market Institutions and Growth

A leftward shift in the vertical supply curve may occur due to the breakdown of key market institutions.
Neoclassical economists prioritize long-term growth over fighting recessions, as living standards are fundamentally tied to long-term economic expansion.

Output and Aggregate Demand

If aggregate supply is vertical, changes in aggregate demand do not influence the quantity of output produced in the economy.

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Test your knowledge of key concepts from Chapter 13 of Macroeconomics with these flashcards. This chapter focuses on the neoclassical perspective, long-run economic performance, potential GDP, and the natural rate of unemployment. Ideal for students looking to reinforce their understanding of macroeconomic principles.