Questions and Answers
What is expected inflation?
A future rate of inflation that consumers and firms build into current decision making.
What will the unemployment rate on the long-run Phillips curve be?
The natural rate of unemployment.
If an economy goes into recession due to a drop in aggregate demand, which of the following efforts would a neoclassical economist advocate? (Select all that apply)
If an economy goes into recession due to a drop in aggregate demand, which of the following efforts would a Keynesian economist advocate in the short run? (Select all that apply)
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The short-run perspective on the Phillips Curve helps illustrate how inflation can spiral out of control.
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According to neoclassical economists, what will families do when government carries out a policy that increases the debt? (Select all that apply)
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Neoclassical economics believes that fiscal policy does not shift the aggregate demand curve at all.
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What does a neoclassical long-run aggregate supply curve imply about the Phillips curve?
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What is the core assumption(s) of the neoclassical theory?
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When looking at a long-run AS curve, does potential GDP and the rate of unemployment remain the same at every point along the vertical AS curve?
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What does the neoclassical Phillips curve predict will be the long-run outcome for a nation using Keynesian policies to keep unemployment below the natural rate?
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Do neoclassical economists view inflation as an adverse effect of long-term economic growth with no redeeming features?
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According to neoclassical economics, what happens to the price level when aggregate demand increases and aggregate supply is set at potential output?
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In a recession, a _______ economist would likely argue for changes to labor policy institutions and nothing more.
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What is the main difference between the graphs of the aggregate supply curve and the neoclassical Phillips curve?
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In a recession, what does the neoclassical economic model advocate?
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Study Notes
Expected Inflation
- Represents the anticipated future inflation rate that consumers and firms consider in their current decision-making processes.
Phillips Curve and Unemployment
- The unemployment rate along the long-run Phillips curve aligns with the natural rate of unemployment, indicating it remains consistent regardless of inflation levels.
Neoclassical Economic Response to Recession
- Advocates for government initiatives, such as retraining programs for structurally unemployed workers and enhanced welfare programs that incentivize job seeking.
Keynesian Economic Response to Recession
- In the short term, recommends the use of both fiscal and monetary policy measures to stimulate the economy during a recession caused by decreased aggregate demand.
Short-Run Phillips Curve
- Illustrates how inflation can spiral out of control; attempts to lower unemployment below its natural rate can lead to increased consumption, rising prices, and higher inflation.
Government Policy and Family Behavior
- According to neoclassical economists, families anticipate future tax hikes and respond by reducing spending and consumption when the government increases debt through policy measures.
Fiscal Policy Effectiveness
- Neoclassical economists argue that fiscal policy fails to shift the aggregate demand curve, presenting a strong case against its effectiveness.
Long-Run Aggregate Supply and Phillips Curve
- A vertical long-run aggregate supply curve suggests that there is no trade-off between inflation and unemployment in the long run, as depicted by the Phillips curve.
Core Assumptions of Neoclassical Theory
- Focus on individual behavior driven by rational decision-making in self-interest and the notion that individuals strive to maximize utility, wealth, and profits.
Long-Run Aggregate Supply Characteristics
- Potential GDP and the unemployment rate remain constant along the vertical long-run aggregate supply curve when unemployment is at the natural rate.
Consequences of Keynesian Policies
- Prolonged use of Keynesian policies aimed to keep unemployment below the natural rate leads to an inflationary spiral, characterized by rising wages and prices.
Neoclassical View on Inflation
- Contrarily to the Keynesian perspective, neoclassical economists often regard inflation as a negative consequence of long-term economic growth, lacking positive aspects.
Price Levels and Aggregate Demand
- An increase in aggregate demand, while aggregate supply remains at potential output, results in higher price levels according to neoclassical economics.
Neoclassical Perspective on Labor Policy in Recession
- A neoclassical economist typically advocates for adjustments to labor policy institutions during a recession rather than broad economic interventions.
Aggregate Supply Curve vs. Neoclassical Phillips Curve
- The long-run Phillips curve is vertical, contrasting with the downward-sloping appearance of the short-run Phillips curve, highlighting distinct economic behaviors over different time horizons.
Neoclassical Economic Model in Recession
- Advocates for patience and allowing the market to self-correct during recessionary periods rather than implementing aggressive interventionist policies.
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Description
Test your knowledge on key macroeconomic concepts with these flashcards. Topics covered include expected inflation, the long-run Phillips curve, and responses to recessions. Perfect for students looking to reinforce their understanding of macroeconomic principles.
