Question 1

Exhibit 20A-1 Policy Alternatives In Panel (a) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. Classical theory argues:

Accepted Answer

Classical theory argues that the economy will self-correct and that SRAS will shift to the right, leading to a new equilibrium at the full employment GDP level. Therefore, there is no need for government intervention to shift either AD or SRAS.

Question 2

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government or Fed decides to intervene, it would most likely:

Accepted Answer

In order to shift the aggregate demand curve to the right and increase real GDP and price level, the government or Fed should increase government spending for goods and services. Increasing taxes or decreasing the money supply would have the opposite effect and decrease aggregate demand. Decreasing government spending would also decrease aggregate demand.

Question 3

Assume the economy is operating at a real GDP above full-employment real GDP. Keynesian economists would prescribe which of the following policies?

Accepted Answer

Keynesian economists would prescribe contractionary policies to reduce aggregate demand and bring the economy back to full-employment real GDP, as the economy is operating above its potential, which can lead to inflation.

Question 4

A policy to do nothing and allow the economy to self-correct or adjust without interference from the federal government is also called a(n) ____ policy:

Accepted Answer

A policy to do nothing and allow the economy to self-correct or adjust without interference from the federal government is commonly referred to as a nonintervention policy. It is also sometimes called a laissez-faire policy.

Question 5

Assume the economy is operating at a real GDP above full-employment real GDP. Classical economists would prescribe which of the following policies?

Accepted Answer

Classical economists believe that the economy is self-correcting and would advocate for nonintervention, allowing market forces to adjust naturally.

Question 6

Classical theory advocates ____ policy and Keynesian theory advocates ____ policy.

Accepted Answer

Classical theory advocates for nonintervention in the economy, promoting laissez-faire policies and minimal government interference. On the other hand, Keynesian theory advocates for intervention through active government policies such as increased government spending, tax cuts, and monetary stimulus measures to stabilize the economy.

Question 7

Assume the economy is experiencing an inflationary gap, classical economists believe that:

Accepted Answer

Classical economists believe that flexible wages will restore full employment. They argue that market forces will lead to a decrease in wages in response to the excess demand for labor that is causing the inflationary gap. As wages decrease, firms will reduce their prices, leading to a reduction in aggregate demand and ultimately a return to full employment. Classical economists do not believe that government intervention, such as changes in spending or interest rates, is necessary or effective in addressing inflationary gaps.

Question 8

Assuming the economy is experiencing a recessionary gap, classical economists predict that:

Accepted Answer

According to classical economists, lower wages will shift the short-run aggregate supply curve rightward, as it decreases production costs and increases firm profitability, leading to an increase in output and employment, and thus closing the recessionary gap.

Question 9

Exhibit 20A-1 Policy Alternatives Assume that the economy depicted in Panel (b) of Exhibit 20A-1 is in short-run equilibrium where AD₁ equals SRAS₁. Keynesian theory argues:

Accepted Answer

The answer of Exhibit 20A-1  Policy Alternatives  Assume that the...

Question 10

Exhibit 20A-2  Macro AD/AS Models  As shown in Panel (a) of Exhibit 20A-2, assume the economy adopts a classical nonintervention policy. Which of the following would cause the economy to self-correct?

Accepted Answer

The answer of Exhibit 20A-2  Macro AD/AS Models  As shown...

Question 11

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, an expansionary Keynesian government stabilization policy designed to move the economy from Y₁ to Y_p would shift the:

Accepted Answer

An expansionary Keynesian policy involves increasing government spending or cutting taxes to increase aggregate demand (AD) and stimulate economic activity. This would shift the AD curve to the right from AD1 to AD2, moving the economy from Y to Y_p. Therefore, the correct answer is B, as the AD curve would shift to the right. The SRAS and LRAS curves would remain unchanged.

Question 12

Exhibit 20A-1 Policy Alternatives Assume that the economy depicted in Panel (a) of Exhibit 20A-1 is in short-run equilibrium where AD equals SRAS₁. If the economy is left to correct itself according to classical theory:

Accepted Answer

The answer of Exhibit 20A-1  Policy Alternatives  Assume that the...

Question 13

Exhibit 20A-2 Macro AD/AS Models In Panel (b) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government or Fed decides to intervene, it would most likely:

Accepted Answer

The answer of Exhibit 20A-2  Macro AD/AS Models  In Panel...

Question 14

​ Assume the economy is experiencing an inflationary gap, Keynesian economists would believe that:

Accepted Answer

Keynesian economists advocate for reducing government spending to decrease aggregate demand and close an inflationary gap.

Question 15

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. Classical theory argues that:

Accepted Answer

According to classical theory, in the long run, wages and prices are fully flexible and will adjust to reach full employment at the natural rate of unemployment. This means that the SRAS curve will shift leftward until it intersects with the vertical LRAS curve at the potential output level (Y_p) and the original price level (P₁). Therefore, long-run equilibrium will be established at Y_p and P₁. Option A is incorrect because the classical theory does not require any government intervention to establish full employment in the long run. Option B is incorrect because the classical theory assumes that wages and prices are fully flexible and will adjust to changes in demand and supply conditions.

Question 16

Exhibit 20A-1 Policy Alternatives In Panel (b) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government decides to intervene, it would most likely:

Accepted Answer

To increase the level of real GDP from Y₁ to YF1U1B11F1U1B0, the government needs to increase aggregate demand. One way to achieve this is by increasing government spending for goods and services, which will lead to an increase in aggregate demand and a shift in the aggregate demand curve to the right. This will increase both real GDP and the price level, leading to the new equilibrium point at YF1U1B11F1U1B0 and PS2U1B12F1U1B0. Therefore, choice C is the best option. The other options would either decrease aggregate demand or have a neutral effect on aggregate demand, leading to no change in real GDP or a decrease in real GDP.

Question 17

Assuming the economy is in a recession, Keynesian economists predict that:

Accepted Answer

The answer of Assuming the economy is in a recession,...

Question 18

Assume the economy is in short-run equilibrium at a real GDP below its potential real GDP. According to Keynesian theory, which of the following policies should be followed?

Accepted Answer

According to Keynesian theory, when an economy is in short-run equilibrium below its potential real GDP, it implies that there are unused resources such as labor and capital. In this case, the government should use expansionary fiscal policy by increasing government spending to stimulate demand and promote economic growth. Increasing money supply by the Federal Reserve may also help by reducing interest rates and encouraging borrowing and investment. However, this policy may be less effective in stimulating demand compared to fiscal policy as individuals and businesses might not be willing to borrow and invest. Doing nothing will not promote economic growth, and the economy might continue to operate below its potential. Therefore, increasing government spending is the best policy choice.

Question 19

Assume the economy is experiencing a recessionary gap. Keynesian economists would support which of the following policies:

Accepted Answer

Keynesian economists would support an expansionary policy to close the recessionary gap. This could involve government spending increases or tax cuts to increase aggregate demand and stimulate economic growth. Nonstabilization and nonintervention policies would not address the problem of a recessionary gap, and fixed wages would not be effective in stimulating economic activity.

Question 20

Assume the economy is in short-run equilibrium at a real GDP above its potential real GDP. According to classical theory, which of the following policies should be followed?

Accepted Answer

According to classical theory, the economy will self-correct and return to its potential real GDP in the long run, so fiscal and monetary policies should not be activist. Therefore, option D is the correct answer. Options A and C involve using fiscal or monetary policy to stimulate the economy, which goes against classical theory. Option B is not a specific policy recommendation, and it does not align with classical theory either.

Quiz 20: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

Exhibit 20A-1 Policy Alternatives In Panel (a) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. Classical theory argues:

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government or Fed decides to intervene, it would most likely:

Assume the economy is operating at a real GDP above full-employment real GDP. Keynesian economists would prescribe which of the following policies?

A policy to do nothing and allow the economy to self-correct or adjust without interference from the federal government is also called a(n) ____ policy:

Assume the economy is operating at a real GDP above full-employment real GDP. Classical economists would prescribe which of the following policies?

Classical theory advocates policy and Keynesian theory advocates policy.

Assume the economy is experiencing an inflationary gap, classical economists believe that:

Assuming the economy is experiencing a recessionary gap, classical economists predict that:

Exhibit 20A-1 Policy Alternatives Assume that the economy depicted in Panel (b) of Exhibit 20A-1 is in short-run equilibrium where AD₁ equals SRAS₁. Keynesian theory argues:

Exhibit 20A-2 Macro AD/AS Models As shown in Panel (a) of Exhibit 20A-2, assume the economy adopts a classical nonintervention policy. Which of the following would cause the economy to self-correct?

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, an expansionary Keynesian government stabilization policy designed to move the economy from Y₁ to Y_p would shift the:

Exhibit 20A-1 Policy Alternatives Assume that the economy depicted in Panel (a) of Exhibit 20A-1 is in short-run equilibrium where AD equals SRAS₁. If the economy is left to correct itself according to classical theory:

Exhibit 20A-2 Macro AD/AS Models In Panel (b) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government or Fed decides to intervene, it would most likely:

Assume the economy is experiencing an inflationary gap, Keynesian economists would believe that:

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. Classical theory argues that:

Exhibit 20A-1 Policy Alternatives In Panel (b) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government decides to intervene, it would most likely:

Assuming the economy is in a recession, Keynesian economists predict that:

Assume the economy is in short-run equilibrium at a real GDP below its potential real GDP. According to Keynesian theory, which of the following policies should be followed?

Assume the economy is experiencing a recessionary gap. Keynesian economists would support which of the following policies:

Assume the economy is in short-run equilibrium at a real GDP above its potential real GDP. According to classical theory, which of the following policies should be followed?

Quiz 20: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

Exhibit 20A-1 Policy Alternatives In Panel (a) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. Classical theory argues:

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the federal government or Fed decides to intervene, it would most likely:

Assume the economy is operating at a real GDP above full-employment real GDP. Keynesian economists would prescribe which of the following policies?

A policy to do nothing and allow the economy to self-correct or adjust without interference from the federal government is also called a(n) ____ policy:

Assume the economy is operating at a real GDP above full-employment real GDP. Classical economists would prescribe which of the following policies?

Classical theory advocates ____ policy and Keynesian theory advocates ____ policy.

Assume the economy is experiencing an inflationary gap, classical economists believe that:

Assuming the economy is experiencing a recessionary gap, classical economists predict that:

Exhibit 20A-1 Policy Alternatives Assume that the economy depicted in Panel (b) of Exhibit 20A-1 is in short-run equilibrium where AD1 equals SRAS1. Keynesian theory argues:

Exhibit 20A-2 Macro AD/AS Models As shown in Panel (a) of Exhibit 20A-2, assume the economy adopts a classical nonintervention policy. Which of the following would cause the economy to self-correct?

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, an expansionary Keynesian government stabilization policy designed to move the economy from Y1 to Yp would shift the:

Exhibit 20A-1 Policy Alternatives Assume that the economy depicted in Panel (a) of Exhibit 20A-1 is in short-run equilibrium where AD equals SRAS1. If the economy is left to correct itself according to classical theory:

Exhibit 20A-2 Macro AD/AS Models In Panel (b) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the federal government or Fed decides to intervene, it would most likely:

​ Assume the economy is experiencing an inflationary gap, Keynesian economists would believe that:

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. Classical theory argues that:

Exhibit 20A-1 Policy Alternatives In Panel (b) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the federal government decides to intervene, it would most likely:

Assuming the economy is in a recession, Keynesian economists predict that:

Assume the economy is in short-run equilibrium at a real GDP below its potential real GDP. According to Keynesian theory, which of the following policies should be followed?

Assume the economy is experiencing a recessionary gap. Keynesian economists would support which of the following policies:

Assume the economy is in short-run equilibrium at a real GDP above its potential real GDP. According to classical theory, which of the following policies should be followed?

Exhibit 20A-1 Policy Alternatives In Panel (a) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. Classical theory argues:

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government or Fed decides to intervene, it would most likely:

Classical theory advocates policy and Keynesian theory advocates policy.

Exhibit 20A-1 Policy Alternatives Assume that the economy depicted in Panel (b) of Exhibit 20A-1 is in short-run equilibrium where AD₁ equals SRAS₁. Keynesian theory argues:

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, an expansionary Keynesian government stabilization policy designed to move the economy from Y₁ to Y_p would shift the:

Exhibit 20A-1 Policy Alternatives Assume that the economy depicted in Panel (a) of Exhibit 20A-1 is in short-run equilibrium where AD equals SRAS₁. If the economy is left to correct itself according to classical theory:

Exhibit 20A-2 Macro AD/AS Models In Panel (b) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government or Fed decides to intervene, it would most likely:

Assume the economy is experiencing an inflationary gap, Keynesian economists would believe that:

Exhibit 20A-2 Macro AD/AS Models In Panel (a) of Exhibit 20A-2, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. Classical theory argues that:

Exhibit 20A-1 Policy Alternatives In Panel (b) of Exhibit 20A-1, the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂. If the federal government decides to intervene, it would most likely: