Chapter 35, Problem 2FRQ

a)

To determine

Fundamental conclusion of the classical model of the price level

Explanation of Solution

The classical model of the price level concludes that since the aggregate supply curve is vertical, changes in the money supply only impact the overall level of prices. According to this conclusion, the classical model of price level would be most applicable during the time period of high inflation because it helps to adjust the price at equilibrium.

Economics Concept Introduction

Introduction: The classical model of price indicates that economy is flowing freely and prices can be adjusted according to the ups and downs in the economy such as in good economic condition, prices will go up.

b)

To determine

Fundamental conclusion of Keynesian economics

Explanation of Solution

According to the fundamental conclusion of Keynesian economics, variations in aggregate demand impact the aggregate output. This conclusion specifies that the prices can rigid as changes in any aspect of spending, whether government, investment, or consumer spending, they affect the output to change.

Economics Concept Introduction

Introduction: According to Keynesian economics, the rigidity in levels of price can fluctuate other components such as spending, investment, consumption by affecting the output level.

c)

To determine

Fundamental conclusion of Monetarism

Explanation of Solution

The fundamental conclusion of Monetarism specifies that Business cycles and changes in the money supply are related. According to this theory, the most important factors affecting the rate of economic development and the behavior of the business cycle are the changes in supply of money.

Economics Concept Introduction

Introduction: The main aim of monetary policy is to control the supply of money in an economy to achieve the targeted economic growth. And according to monetarists, money supply is the large source that guide the economic development or growth in the country.

d)

To determine

Fundamental conclusion of the natural rate hypothesis

Explanation of Solution

The natural rate hypothesis conclude that the unemployment rate must be regulated so that expected inflation and actual inflation are equal in order to prevent inflation. According to this theory, inflation rate would not remain steady until the unemployment rate reaches its natural or normal level.

Economics Concept Introduction

Introduction: The theory of natural rates contained two supporting hypotheses from which first specifies that monetary policy has no bearing on the natural rate of unemployment. Furthermore, there is no long-term trade-off between inflation and the departure of unemployment from the natural rate.

e)

To determine

Fundamental conclusion of Rational expectations

Explanation of Solution

According to fundamental conclusion of rational expectations, by utilizing of all available information, individuals and business organizations can come to the best decisions. This theory uses historical data rather than real time data.

Economics Concept Introduction

Introduction: the theory of rational expectations states that individuals base their selections and decisions according to the best available information in the market and take note of historical trends.

f)

To determine

Fundamental conclusion of Real business cycle theory

Explanation of Solution

Real business cycle theory concludes that the vertical aggregate supply curve shifts as a result of variations in total factor productivity growth, which in turn causes fluctuations in the business cycle. This theory supports by offering an integrated method for understanding the theory of growth and fluctuations.

Economics Concept Introduction

Introduction: Real-business-cycle theory depicts that changes in technology lead to changes in output and employment because the economy's capacity to transform inputs into outputs fluctuates.