Question 1

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, meaning that the production of goods and services generates income, which in turn creates the demand for those goods and services. This leads to long-term real GDP stability in the classical model.

Question 2

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. The other choices (A, C, D) are assumptions of the classical model.

Question 3

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, but it does not address the issue of overproduction. In fact, Say's law suggests that as long as producers create goods and services, there will always be enough demand to purchase them.

Question 4

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

Accepted Answer

Say's law states that production and supply create their own demand, meaning that the act of producing and supplying goods generates the necessary income and purchasing power for consumers to buy those goods, creating a self-sustaining cycle of economic activity.

Question 5

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 assumes that all wages and prices are flexible, meaning that they can adjust quickly to changes in supply and demand. This assumption is central to the classical view that markets will naturally reach an equilibrium without the need for government intervention.

Question 6

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 states that supply creates its own demand, meaning that producers will always find buyers for their goods and services if they bring them to market. This implies that supply and demand will always be in balance in a free market economy. Therefore, Option A is the correct choice. Options B, C, and D are incorrect as they do not represent the essence of Say's law.

Question 7

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 8

Which of the following is NOT a major assumption of the classical model?
A) People are motivated by self-interest.
B) People can be fooled by money illusion.
C) Prices are flexible.
D) Wages are flexible.

Accepted Answer

The classical model assumes that people are rational and do not suffer from money illusion, meaning they understand the difference between nominal and real prices. Therefore, option B is not a major assumption of the classical model.

Question 9

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 flexible prices and wages, not fixed ones.

Question 10

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 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 classical economists such as Adam Smith, David Ricardo, and John Stuart Mill.

Question 11

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 12

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 of the listed individuals - Adam Smith, A. C. Pigou, and David Ricardo - are considered to be classical economists.

Question 13

"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 economist Jean-Baptiste Say. According to Say's law, production of goods and services generates income that allows people to purchase other goods and services, and thus, supply creates its own demand. This is in contrast to the idea of a shortage in demand causing economic downturns, as proposed by John Maynard Keynes.

Question 14

If a consumer buys less gasoline because gas prices decreased by 10 percent, even though all other prices have also decreased by 10 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

This scenario illustrates the concept of money illusion, which refers to the tendency of individuals to focus on nominal values (i.e. the actual dollar amount) rather than real values (i.e. the purchasing power). In this case, the consumer is not recognizing that a 10 percent decrease in gas prices is offset by a 10 percent decrease in all other prices, resulting in no real change in purchasing power. Therefore, the consumer is not making an informed decision based on real values, but rather is being misled by the nominal values.

Question 15

All of the following were classical economists EXCEPT
A) Adam Smith.
B) A. C. Pigou.
C) David Ricardo.
D) Milton Friedman.

Accepted Answer

Milton Friedman was a neoclassical economist, not a classical economist.

Question 16

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 the income generated by production is fully spent on purchasing all the goods and services produced, leading to a state of equilibrium where there is no unemployment or inflation. Therefore, option B is the correct choice. Options A, C, and D are incorrect as they are not consistent with the assumptions of the classical model.

Question 17

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

The answer of Which of the following is an example...

Question 18

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 19

Classical economists assumed that
A) prices were flexible.
B) individuals did not suffer from money illusion.
C) wages were flexible.
D) all of the above

Accepted Answer

Classical economists believed that prices, wages, and individuals' behavior would be flexible in response to changes in the economy, and they did not believe in the concept of money illusion, where individuals may not understand the true value of their money due to inflation or deflation.

Question 20

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

Say's law, often summarized as "supply creates its own demand," implies that in an economy, the production of goods will generate an equivalent amount of demand, meaning desired expenditures will equal actual expenditures.

Quiz 11: Classical and Keynesian Macro Analyses

Say's law explains

All the following are assumptions of the classical model EXCEPT

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

The idea that supply creates its own demand is known as

The classical model uses the assumption that

Say's law states that

Classical economists wrote from the 1770s to the ________.

Which of the following is NOT a major assumption of the classical model?

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

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.

The implication of Say's law is that

Whom among the following was a classical economist?

"Supply creates its own demand" is known as

If a consumer buys less gasoline because gas prices decreased by 10 percent, even though all other prices have also decreased by 10 percent, then

All of the following were classical economists EXCEPT

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

Which of the following is an example of money illusion?

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

Classical economists assumed that

Say's law says that