Questions and Answers
What term is often used interchangeably with 'classical economist'?
Laissez-faire economist.
A Keynesian economist would most likely blame the increase in unemployment between 2007 and 2009 on what?
A decline in the level of aggregate demand.
What was the popular view of government before the Great Depression?
Laissez-faire.
What was the laissez-faire policy prescription to eliminate unemployment?
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What did classical economists argue about unemployment?
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Did classical economists favor hiring unemployed workers for public works programs as a solution to the Depression?
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What are aggregate demand management policies designed to control?
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What is potential income?
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How did Keynes believe equilibrium income is fixed?
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What occurs in the paradox of thrift?
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What did Keynes argue was more important, the short run or the long run?
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Why does the AS/AD model not depend on substitution and opportunity cost concepts?
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What effect do falling prices have on people's purchasing power?
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What happens when aggregate demand declines and puts pressure on the price level to fall?
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What is the likely outcome of a fall in a foreign country's income?
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What effect does an expectation of future demand increase have on the aggregate demand curve?
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What is the expected result of the new government of Pakistan transferring money from the rich to the poor?
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What should happen in terms of the AS-AD model when government expenditures decrease after a war?
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What is the likely outcome of an increase in production costs?
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What should happen with increased oil prices and declining labor productivity?
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Study Notes
Classical vs. Keynesian Economics
- "Classical economist" is synonymous with "laissez-faire economist."
- Keynesian economists attribute rising unemployment (e.g., from under 5% to over 8% between 2007 and 2009) to a decline in aggregate demand.
Economic Perspectives Pre- and Post-Great Depression
- Before the Great Depression, the dominant view favored a laissez-faire government approach.
- Post-Depression, the view shifted towards government activism in economic affairs.
Approaches to Unemployment
- Laissez-faire policy recommends eliminating labor unions and government mandates that keep real wages elevated as a solution to unemployment.
- Classical economists believe unemployment is self-correcting through falling wages and prices.
Responses to Economic Crisis
- Classical economists rejected public job creation programs as a solution to the Depression.
Aggregate Demand Management
- Aggregate demand management policies aim to control overall spending in the economy, influencing economic performance.
Income Levels and Inflation
- Potential income reflects the maximum output an economy can sustain without triggering inflation.
- Keynes argued that equilibrium income can fluctuate and is not fixed at potential income.
Economic Paradoxes
- The paradox of thrift suggests that increased saving can lead to decreased overall economic output.
Short-run vs. Long-run Policy Focus
- Keynes emphasized the importance of short-term economic policy issues over long-term considerations.
AS/AD Model Insights
- The Aggregate Supply/Aggregate Demand (AS/AD) model focuses on total output, disregarding concepts like substitution and opportunity cost.
Wealth Effects and Consumption
- The money wealth effect describes how falling prices enhance purchasing power, leading to increased spending.
Dynamics of Aggregate Demand
- A decline in aggregate demand can trigger expectations for further demand fall, asset price declines, and potential financial crises, resulting in leftward shifts of the aggregate demand curve.
Impact of Foreign Income Changes
- A decrease in foreign income typically results in reduced U.S. exports, leading to a leftward shift in the U.S. aggregate demand curve.
Business Expectations and Aggregate Demand
- Anticipated increases in future demand shift the aggregate demand curve to the right.
Government Transfers and Aggregate Demand
- In Pakistan, transferring wealth from the rich to the poor can potentially shift the aggregate demand curve to the right.
Government Spending Changes During War
- The conclusion of the Korean War in 1953, and subsequent reduction in government spending, is expected to shift the aggregate demand curve to the left.
Production Cost Effects
- Rising production costs likely lead to an upward (to the left) shift in the short-run aggregate supply curve.
Oil Prices and Productivity
- Sharp increases in oil prices coupled with declining labor productivity growth in late 2004 predict an upward (to the left) shift in the short-run aggregate supply curve.
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Description
Test your knowledge of key concepts from Chapter 9 of Colander's Macroeconomics. This quiz includes important terms such as classical economists and the factors influencing unemployment rates. Perfect for students looking to reinforce their understanding of macroeconomic principles.
