Chapter 13 - The Neoclassical Perspective

Question 1

Neoclassical perspective

Answer 1

The economy will fluctuate around its potential GDP and its natural rate of unemployment

Question 2

2 building blocks of neoclassical perspective

Answer 2

The size of the economy is determined by potential GDP, and wages and prices will adjust in a flexible manner so that the economy will adjust back to its potential GDP level of output

Question 3

Adaptive expectations

Answer 3

People look at past experience and gradually adapt their beliefs and behaviour as circumstances change. Takes a while for things to change

Question 4

Physical capital per person

Answer 4

Amount and kind of machinery and equipment available to help a person produce a good or service

Question 5

Rational expectations

Answer 5

People form the most accurate possible expectations about the future that they can, using all information available to them. Changes happen quickly.

Question 6

Neoclassical view on long-term AS curve

Answer 6

Vertical

Question 7

Neoclassical perspective on unemployment

Answer 7

Reducing the natural rate of unemployment caused by economic institutions and government policies rather than the cyclical unemployment caused by recession

Question 8

Neoclassical perspective on the Phillips curve

Answer 8

Vertical, so no long run trade off between inflation and unemployment

Question 9

Neoclassical perspective on economic growth

Answer 9

Fostered by a stable economic environment with a low rate of inflation

Question 10

8 factors of neoclassical economics summary

Answer 10

1. Long-term focus
2. Flexible prices and wages
3. Economic output is determined by aggregate supply
4. Vertical slope of aggregate supply
5. Vertical slope of Phillips curve
6. Aggregate demand is useful for controlling inflation
7. Policy for reducing unemployment is reforming labor market institutions
8. Aggregate demand is only useful in the short run during recessions, but may just increase inflation instead

Question 11

More emphasis on long term growth or fighting recession?

Answer 11

Long-term growth

Question 12

8 factors of Keynesian economics summary

Answer 12

1. Short-term focus
2. Sticky prices and wages
3. Economic output is determined by aggregate demand
4. Upward slope of aggregate supply
5. Downward slope of Phillips curve
6. Aggregate demand is useful for controlling inflation
7. Increase aggregate demand to eliminate cyclical unemployment
8. Aggregate demand us useful in ending recession