Question 1

The classical model uses the assumption that
A)all wages and prices are flexible.
B)monopoly is widespread in the economy.
C)interest rates are not flexible.
D)economic markets are fragile and have no tendency to move towards an equilibrium.

Accepted Answer

The classical model is based on the assumption of full wage and price flexibility. This means that wages and prices adjust perfectly to changes in demand and supply, allowing the economy to always reach a state of equilibrium.

Question 2

Whom among the following was a classical economist?
A)Adam Smith
B)A. C. Pigou
C)David Ricardo
D)all of the above

Accepted Answer

All three individuals (Adam Smith, A.C. Pigou, and David Ricardo) were prominent classical economists who contributed significantly to the development of economic thought during the 18th and 19th centuries.

Question 3

Which of the following is an example of money illusion?
A)An individual is willing to work more hours when the nominal wage rises by 10 percent and the overall price level rises by 5 percent.
B)An individual is willing to work more hours when the nominal wage rises by 10 percent and the overall price level rises by 20 percent.
C)An individual will neither increase nor decrease the number of hours she is willing to work when the nominal wage rises by 10 percent and the overall price level rises by 10 percent.
D)none of the above

Accepted Answer

B

Question 4

According to the classical model, the income generated by production is
A)enough to meet the needs of everyone in society.
B)enough to purchase all the goods and services produced.
C)fully spent on savings.
D)always insufficient to purchase all the goods and services produced.

Accepted Answer

The classical model assumes that income generated by production is always enough to purchase all the goods and services produced (i.e., it assumes full employment and that all resources are being utilized efficiently). This is known as Say's law, which states that supply creates its own demand. Therefore, choice B is the best answer.

Question 5

Say's law explains
A)how long-term real Gross Domestic Product (GDP)stability is achieved in the classical model.
B)how long-run real Gross Domestic Product (GDP)stability is achieved in the Keynesian model.
C)how the economy can go into recession.
D)why economies experience business cycles.

Accepted Answer

Say's law states that "supply creates its own demand," which means that in the long run, the total supply of goods and services in the economy will generate enough demand to purchase them, resulting in long-term real GDP stability in the classical model.

Question 6

The idea that supply creates its own demand is known as
A)the law of supply.
B)the law of demand.
C)Keynes' law.
D)Say's law.

Accepted Answer

This idea is known as Say's law, which states that the production of goods and services generates the income necessary to purchase them, therefore supply creates its own demand.

Question 7

If a consumer buys less gasoline because gas prices increased by 100 percent, even though all other prices have also increased by 100 percent, then
A)the consumer is paying too close attention to changes in relative prices.
B)wages and prices are too flexible.
C)the consumer has been fooled by money illusion.
D)inflation is not a problem in the economy.

Accepted Answer

The consumer has been fooled by money illusion, meaning they are only considering the nominal increase in gasoline prices and not the fact that all prices have increased by the same percentage. This can happen when people focus on the nominal value of prices rather than their real value adjusted for inflation.

Question 8

Classical economists wrote from the 1770s to the ________.
A)1850s
B)1890s
C)1930s
D)1960s

Accepted Answer

The answer of Classical economists wrote from the 1770s to...

Question 9

"Supply creates its own demand" is known as
A)Smith's law.
B)Say's law.
C)the circular flow.
D)the Ricardian dilemma.

Accepted Answer

"Supply creates its own demand" is known as Say's law, named after French economist Jean-Baptiste Say. It argues that production generates income, which in turn creates demand for other goods and services in the economy.

Question 10

Say's law argues that I. overproduction is typical in a market economy.
II. supply creates its own demand.
A)I only
B)II only
C)Both I and II
D)Neither I nor II

Accepted Answer

Say's law argues that supply creates its own demand, which means that in a market economy, producers will only produce goods and services that they believe people will buy. It does not argue that overproduction is typical, as producers are incentivized to only produce what they believe will be demanded.

Question 11

All of the following were classical economists EXCEPT
A)Adam Smith
B)A. C. Pigou
C)David Ricardo
D)John Maynard Keynes.

Accepted Answer

John Maynard Keynes was a prominent economist of the 20th century who developed the theories of Keynesian economics, which diverged significantly from classical economic principles. Adam Smith, David Ricardo, and A. C. Pigou are all considered classical economists, who focused on principles such as free markets, supply and demand, and the role of government in the economy.

Question 12

All the following are assumptions of the classical model EXCEPT
A)pure competition exists.
B)buyers and sellers react to nominal money prices rather than to relative prices.
C)people are motivated by self-interest.
D)wages and prices are flexible.

Accepted Answer

The classical model assumes that buyers and sellers react to relative prices rather than nominal money prices.

Question 13

The implication of Say's law is that
A)Gross Domestic Product is the same whether we use the expenditure approach or the income approach.
B)a barter economy is the most efficient economy.
C)increased consumption today leads to increased production tomorrow.
D)overproduction in a market economy is not possible.

Accepted Answer

Say's Law, often summarized as "supply creates its own demand," implies that overproduction (or general gluts) in a market economy is not possible because everything produced will eventually be matched by demand. This is because the act of producing goods generates income, which in turn is used to demand other goods.

Question 14

In the classical model, an increase in aggregate demand will cause
A)an increase in actual output, or Gross Domestic Product (GDP).
B)a decrease in actual output, or Gross Domestic Product (GDP).
C)an increase in price level.
D)a decrease in price level.

Accepted Answer

In the classical model, it is assumed that the economy is always at full employment, so an increase in aggregate demand primarily causes an increase in the price level rather than a change in actual output.

Question 15

The first systematic attempt to explain the determinants of the price level and national levels of income, employment, consumption and real Gross Domestic Product (GDP)was made by ________ economists.
A)Keynesian
B)supply-side
C)monetarist
D)classical

Accepted Answer

The question refers to the first systematic attempt to explain macroeconomic phenomena, which was made by classical economists such as Adam Smith, David Ricardo, and John Stuart Mill in the 18th and 19th centuries. The other schools of thought mentioned in the options emerged in the 20th century as responses to the perceived shortcomings of classical theory.

Question 16

Say's law says that
A)consumption is greater than supply.
B)desired expenditures always equal actual expenditures.
C)people produce the goods they consume.
D)people consume the goods they produce.

Accepted Answer

The answer of Say's law says that
A)consumption is greater than...

Question 17

Which of the following is NOT an assumption of the classical model?
A)Wages and prices are fixed.
B)People are motivated by the own self-interest.
C)Pure competition exists.
D)Buyers react to changes in relative prices.

Accepted Answer

The classical model assumes that wages and prices are flexible in response to changes in supply and demand.

Question 18

According to the circular flow of income and output, saving causes
A)total output to fall.
B)consumption expenditures and total output to fall.
C)consumption expenditures to fall short of total output.
D)investment spending to fall.

Accepted Answer

Savings in the circular flow of income and output model represent income not used for consumption. This leads to consumption expenditures being less than the total output, as the saved portion of income is not immediately spent on goods and services.

Question 19

Classical economists assumed that
A)prices were sticky.
B)individuals suffered from money illusion.
C)wages were inflexible.
D)none of the above.

Accepted Answer

Classical economists believed in the flexibility of prices and wages, and they did not assume that prices were sticky or that individuals suffered from money illusion. They believed that market forces would always lead to full employment and economic equilibrium in the long run.

Question 20

Say's law states that
A)supply creates its own demand.
B)supply and demand are never equal.
C)demand may be greater than supply.
D)supply will usually be greater than demand.

Accepted Answer

Say's law, also known as the law of markets, asserts that the production of goods and services is the key driver of economic activity and that supply creates its own demand. This means that producers must anticipate demand and adjust supply accordingly, ensuring that all goods produced are purchased by consumers. In other words, the act of producing goods and services creates income for the economy, which in turn creates demand for those same goods and services.

Quiz 10: Classical and Keynesian Macro Analyses

The classical model uses the assumption that

Whom among the following was a classical economist?

Which of the following is an example of money illusion?

According to the classical model, the income generated by production is

Say's law explains

The idea that supply creates its own demand is known as

If a consumer buys less gasoline because gas prices increased by 100 percent, even though all other prices have also increased by 100 percent, then

Classical economists wrote from the 1770s to the ________.

"Supply creates its own demand" is known as

Say's law argues that I. overproduction is typical in a market economy. II. supply creates its own demand.

All of the following were classical economists EXCEPT

All the following are assumptions of the classical model EXCEPT

The implication of Say's law is that

In the classical model, an increase in aggregate demand will cause

The first systematic attempt to explain the determinants of the price level and national levels of income, employment, consumption and real Gross Domestic Product (GDP) was made by ________ economists.

Say's law says that

Which of the following is NOT an assumption of the classical model?

According to the circular flow of income and output, saving causes

Classical economists assumed that

Say's law states that