Econ Macro (book Only)
6th Edition
ISBN: 9781337408745
Author: William A. McEachern
Publisher: Cengage Learning
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Question
Chapter 11, Problem 10P
To determine
the assumption of classical economists with regards to the flexibility of wages, prices and interest rates, the implication of self- correcting tendenciesin an economy in case of recession and the disagreements of k’s with classical economists.
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What would a Keynesian likely recommend in response to a recession? What would a neoclassical likely recommend? Why would a Keynesian policy response not make much sense in response to a minor recession like the one that occurred in 1990? What would be the cost of letting the economy adjust by itself to a new long run equilibrium?
Keynes advocated the use of fiscal and monetary policy to stabilize an economy? When are the effects of these policies most beneficial? Select all that apply.
Select one or more:
In the short run
When the economy is operating at full employment
When the economy is operating significantly above full employment
When the economy is operating significantly below full employment
In the long run
Keynes recommended that high unemployment should be remedied with
a reduction in the money supply
an increase in government expenditures
an increase in taxes
an increase in aggregate supply
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- How would the level of aggregate demand be affected by a rise in the interest rate in the Keynesian theory? Which components would be affected most strongly?arrow_forwardIn the “real world” prices are not fixed, and hence the aggregate supply curve is not completely horizontal with a slope of zero. In order to illustrate why it is that aggregate supply curves slope up and to the right, Keynes made two crucial assumptions about the operation of the labor market. What were those two assumptions?arrow_forwardA friend of yours (who has not taken macroeconomics) has just read that Keynesian theory represented a direct attack on Classical theory. They don't understand either theory and knows you (having just taken macroeconomics) are well-versed in both. They ask you to explain the basic differences between how Keynes and the Classics understood the business cycle and their respective policy prescriptions. Your answer should probably include: a) a basic explanation of what full-employment GDP means and how it relates to the stability condition S=| (or, equivalently, leakages = injections); b) an explanation of why the Classicals believed that any movement away from full-employment GDP would be quickly fixed/reversed; c) an explanation of why Keynes thought the Classicals* "auto-correcting" story was problematic, i.e., a detailed explanation of Keynes' multiplier concept (how did Keynes believe a recession would unfold (step-by-step) and why did he believe it could persist); d) an explanation…arrow_forward
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