Ch11 - Classical And Keynesian Econ

Question 0

Primary difference between Keynesian and classical economics…

Answer 0

Classical - at or trending toward full employment

Keynesian - trending toward, away from, or at full Employment.

Question 1

What is the supply demand relationship in classical Econ?

Answer 1

Supply creates its own demand. (Says law)

Question 2

What is the Classical relationship between Investment and Savings?

Answer 2

I = S

Question 3

What is equilibrium price?

Answer 3

The price that clears the market.

Question 4

Classical economists view on unemployment…

Answer 4

Unemployment is a function of surplus labor; it’s temporary and flexible wages mean no involuntary unemployment.

Question 5

What is Classical Equilibrium?

Answer 5

Where Aggregate Demand = Aggregate Supply you have full employment.

Question 6

What is aggregate demand?

Answer 6

Total value of real GDP that all sectors of the economy are willing to purchase at flexible prices.

Question 7

In the Loanable funds model what is interest?

Answer 7

The price of money

Question 8

In the Loanable funds model, what slope is the “Demand for loans”?

Answer 8

Downward sloping

Question 9

In the Loanable funds model, what direction is the slope of “supply of funds”?

Answer 9

Upward slope

Question 10

Where is the “Equilibrium” on the Loanable funds model?

Answer 10

Where the demand for loans equals the supply of funds.

Question 11

Demand for loans is driven by what 3 things?

Answer 11

Changes in:

1. perceived business opportunities.
2. Govt spending.
3. expectations about future inflation.

Question 12

Supply of Loanable funds is driven by what 3 things?

Answer 12

Changes in:

1. Private savings
2. Capital inflows
3. Expectations about future inflation.

Question 13

In classical system equilibrium what are prices and wages?

Answer 13

Flexible, and trend towards equilibrium

Question 14

Aggregate demand has what kind of relationship between price level and amount of output demanded?

Answer 14

Inverse relationship.

Question 15

Why does aggregate demand curve have a downward slope?

Answer 15

1. Real balance effect
2. Interest rate effect
3. Foreign purchases effect

Question 16

What are the primary determinants of Aggregate demand?

Answer 16

Changes in:

1. Consumer spending (change in wealth)
2. Investment spending (change in interest rates, expected returns)
3. Gov spending
4. Net Export spending (change in world income or exchange rates)

Question 17

What is aggregate supply?

Answer 17

Amount of real output firms will produce at each price level.

Question 18

Long run aggregate supply curve is what shape at full employment output?

Answer 18

Vertical

Question 19

Why does the Short run aggregate supply curve slope upwards?

Answer 19

Rising costs of per unit production as output increases.

Question 20

What are the 4 determinants of aggregate supply?

Answer 20

1. Changes in wages
2. Changes in commodity prices
3. Productivity
4. Changes in other factors that affect production costs (taxes, regulation, etc.)

Question 21

Why is the LRAS supply curve vertical?

Answer 21

Changes in aggregate price have no effect on aggregate output.

Question 22

What is LRAS potential output?

Answer 22

Level of real GDP possible assuming all prices including nominal wages are fully flexible

Question 23

What happens when LRAS actual aggregate output exceeds the potential output?

Answer 23

Nominal wages rise ➡ SRAS curve shifts left ➡ higher price level at potential output.

Question 24

What happens when LRAS actual aggregate output falls below potential output?

Answer 24

Nominal wages fall➡SRAS curve shifts right➡lower price level at potential output

Question 25

Classical system recession wants how much gov action?

Answer 25

None; the economy is self adjusting with flexible prices.

Question 26

Classical econ say the fall in Aggregate Demand will cause business to do what?

Answer 26

Lower prices to clear the market until equilibrium with lower prices.

Question 27

What was Keynes’ 3 critiques of Classical Econ?

Answer 27

1. S=I is not true, interest rates are not locked to savings or investment behavior.
2. Wages not flexible downward (labor unions decrease flex)
3. Prices not always downward flexible - some businesses will wait out recession.

Question 28

What was Keynes’ view of Full Employment Equilibrium?

Answer 28

Economy doesn’t trend toward full employment equilibrium; can be below, above, or at full employment equilibrium.

Question 29

Keynes thought what about demand/supply?

Answer 29

Economy is demand driven - companies only produce what it thinks the market will purchase.

Question 30

Income-Expenditure model

Answer 30

GDP=C+I
GDP=C+I planned+I unplanned
GDP=AE+I unplanned

Question 31

What is equilibrium in the Income-Expenditure model?

Answer 31

When planned aggregate expenditure = Real GDP

Question 32

What happens when planned aggregate spending is greater than real GDP?

Answer 32

Unplanned inventory is negative and business respond by increasing output.

Question 33

What happens when planned aggregate spending is less than real GDP?

Answer 33

Unplanned inventory is positive and businesses decrease output.

Question 34

Keynes’ view of equilibrium?

Answer 34

Equilibrium (GDP=C+I) doesn’t have to happen at Full Employment Output.

Question 35

How would Keynes offset demand shock?

Answer 35

Use of Fiscal and Monetary policy.