Question 1

Consider the impact of an increase in labor-enhancing technology within the classical model.Provide graphs to illustrate what happens to real wages,labor,output,and the price level.

Accepted Answer

An increase in labor-enhancing technology will shift the production function upwards,which will increase labor demand and increase the real wage.This will increase the aggregate supply curve,which increases output and reduces the price level.

Question 2

What does the Classical model predict about the relationship between a country's budget balance (total revenue minus total spending)and a country's level of real interest rates and investment in a closed economy? Use a graph of the capital market to illustrate.

Accepted Answer

A higher budget deficit shifts the I+(G-T)curve to the right,increasing real interest rates.Higher real interest rates lead to a reduction in the quantity demanded of investment.

Question 3

Two countries are experiencing 10% money growth a year.However,country A is growing at 2% and country B is growing at 5%.Which country will have the higher inflation rate?

Accepted Answer

According to the quantity theory,countries with a higher level of output will have a lower price level holding the money supply and velocity constant.As a result,the faster growing country will experience lower inflation.

Question 4

Why do people hold money in the classical model?

Accepted Answer

The answer of Why do people hold money in the...

Question 5

According to the quantity theory of money,the quantity of money determines the

Accepted Answer

According to the quantity theory of money, the quantity of money in an economy determines the overall price level. This theory states that there is a direct relationship between the money supply and the price level, assuming other factors such as technology, labor and capital remain constant. As the money supply increases, prices will rise and vice versa. Therefore, the correct answer is (C) price level.

Question 6

Explain the intuition behind why the aggregate demand curve is downward sloping.Why does an increase in the money supply shift the aggregate demand curve to the right?

Accepted Answer

The answer of Explain the intuition behind why the aggregate...

Question 7

In the equilibrium version of the classical model,the velocity of money

Accepted Answer

The velocity of money in the classical model is often assumed to be stable or constant in the short run, reflecting the idea that the rate at which money circulates in the economy does not change rapidly over short periods. This assumption allows for the prediction of the relationship between the money supply, the price level, and output.

Question 8

What is the difference between savings and investment?

Accepted Answer

The answer of What is the difference between savings and...

Question 9

In the classical model,a rise in the marginal income tax rate would

Accepted Answer

In the classical model, a rise in the marginal income tax rate would reduce the incentive to work and produce, leading to a fall in real output. The fall in real output would then lead to a rise in the price level, as the demand for goods and services would exceed the supply.

Question 10

According to the quantity theory of money,a 10-percent increase in the money stock would lead to a 10-percent rise in the

Accepted Answer

The quantity theory of money suggests that a change in the money stock directly affects the price level and nominal variables, such as nominal GNP, but not real variables like real GNP. Therefore, both a 10-percent increase in the money wage and the price level (A) and a 10-percent rise in the level of nominal GNP (C) are consistent with this theory, making E the correct choice.

Question 11

During the recession of 2008,the U.S.experienced lower real interest rates at the same time investment and GDP were falling.How would a Classical economist explain this recession? Provide a graph of the Classical capital market to illustrate your arguments.

Accepted Answer

The answer of During the recession of 2008,the U.S.experienced lower...

Question 12

The Fisherian version of the quantity theory equation is

Accepted Answer

The Fisherian version of the quantity theory of money equation is MV = Py, where M is the supply of money, V is the velocity of money, P is the price level, and y is the level of real output. This equation states that the total amount of money spent in an economy is equal to the total quantity of goods and services sold at a given price level.

Question 13

The classical model predicts that,in the short-run,a tax cut financed by an increase in the money supply would

Accepted Answer

The classical model assumes that prices are flexible and that the economy is always at full employment. Therefore, a tax cut financed by an increase in the money supply would increase the price level due to higher aggregate demand, but output would remain unchanged as it is determined by factors of production, not demand.

Question 14

In the classical model,the level of business investment was a function of

Accepted Answer

In the classical model, the level of business investment was determined by both the expected profitability of investment projects (which is influenced by factors such as technology, consumer preferences, and expected future conditions) and the real interest rate (which represents the opportunity cost of investing in a particular project). Therefore, choice C is the correct answer. Neither nominal interest rate nor only the real interest rate or only the expected profitability of investment projects accurately represent the factors that influence business investment according to the classical model.

Question 15

In the classical model,an increase in saving is assumed to increase

Accepted Answer

According to the classical model, an increase in saving will lead to an increase in the supply of loanable funds. This is because when people save more, banks have more money to lend out, increasing the supply of loanable funds. The increase in supply will lead to a decrease in interest rates, as the interest rate is the price of borrowing funds. Therefore, choice B is the best answer.

Question 16

Contrast the Cambridge and Fisher versions of the quantity theory.Explain why the Cambridge version of the quantity theory represents a more modern monetary theory when compared to Fisher's version.

Accepted Answer

The answer of Contrast the Cambridge and Fisher versions of...

Question 17

The quantity theory of money implies that if the money stock were to double,the price level would

Accepted Answer

The quantity theory of money states that the money supply is directly proportional to the price level. Therefore, if the money stock were to double, the price level would also double.

Question 18

Let M = 36,k = 3,L^s= W/P,MPN = L^-1/2 and Y = 2L^1/2.Calculate the labor demand curve,the aggregate demand curve,and the equilibrium values of the real wage,labor,output,and the price level.

Accepted Answer

The answer of Let M = 36,k = 3,L^s=...

Question 19

Discuss the meaning of the phrase of supply-side economics,discussing how it is similar and different from the traditional classical model.Make sure to discuss the role of the Laffer curve in supply-side theory.

Accepted Answer

The answer of Discuss the meaning of the phrase of...

Question 20

According to the classical model,a 10-percent increase in the money supply,holding everything else constant,will lead to

Accepted Answer

The answer of According to the classical model,a 10-percent increase...

Quiz 4: Classical Macroeconomics II: Money,prices,and Interest