Ch26 Neoclassical Perspective

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Ch26 Neoclassical Perspective
Multiple Choice Questions
1. ________________ economists place an emphasis on __________ run economic performance.
A. Phillips; short
B. Keynesian; long
C. Neoclassical; long
D. Says; short
Answer: C  Reference:
Explanation:
Type: Multiple Choice                   
2. The neoclassical perspective on macroeconomics emphasizes that in the long run, the economy seems to rebound back to its _____________ and its ____________________.
A. long term growth; cyclical unemployment
B. potential GDP; natural rate of unemployment
C. natural level of output; cyclical unemployment rate
D. real GDP; natural rate of unemployment
Answer: B  Reference:
Explanation:
Type: Multiple Choice                   
3. Which of the following is a building block of neoclassical economics?
A. the size of the economy is determined by real GDP
B. sticky wages and prices
C. aggregate demand model
D. wages and prices will adjust in a flexible manner
Answer: D  Reference:
Explanation:
Type: Multiple Choice                   
4. Which of the following government policies would be supported by neoclassical macroeconomic assumptions?
A. focus on long-term growth and on controlling inflation 
B. focus on short-term recession and controlling inflation
C. focus on combating depression and cyclical unemployment
D. focus on real GDP and cyclical unemployment
Answer: A  Reference:
Explanation:
Type: Multiple Choice                   
5. Which of the following represents a Keynesian point of view of macroeconomics?
A. focus on long-term growth in the economy
B. aggregate supply is the primary determinate of economic output
C. creating increases in aggregate demand to reduce unemployment
D. vertical aggregate supply
Answer: C  Reference:
Explanation:
Type: Multiple Choice                   
6. From a neoclassical viewpoint, government should focus less on:
A. long-term growth.
B. controlling inflation.
C. aggregate supply.
D. cyclical unemployment.
Answer: D  Reference:
Explanation:
Type: Multiple Choice                   
7. The neoclassical view holds that long-term expansion of potential GDP due to _______________________ will determine ____________________.
A. economic growth; the size of the economy
B. government spending; aggregate demand
C. government spending; aggregate supply
D. economic adjustments; cyclical unemployment
Answer: A  Reference:
Explanation:
Type: Multiple Choice                   
8. The Keynesian view of economics assumes that:
A. the Keynesian Phillips curve is vertical.
B. wages are sticky.
C. the economy must focus is on long-term growth.
D. economic output is primarily determined by aggregate supply.
Answer: B  Reference:
Explanation:
Type: Multiple Choice                   
9. In the neoclassical version of the AD/AS model, which of the following should you use to represent the AS curve?
A. the AS curve shifting as productivity increases
B. an upward sloping curve with a vertical top
C. a vertical line drawn at the level of potential GDP
D. the AS curve shifting as potential GDP expands
Answer: C  Reference:
Explanation:
Type: Multiple Choice                   
10. Which of the following is a distinguishing characteristic of the neoclassical view?
A. increasing price levels will increase the unemployment rate
B. wages and real GDP are sticky over time
C. wages are maintained at original equilibrium
D. flexibility of wages and prices over time
Answer: D  Reference:
Explanation:
Type: Multiple Choice                    
11. A vertical AS curve means that the level of aggregate supply (or potential GDP) will determine the real GDP of the economy, regardless of the level of:
A. cyclical unemployment.
B. real unemployment.
C. aggregate demand.
D. inflationary pressures.
Answer: C  Reference:
Explanation:
Type: Multiple Choice                   
12. In the neoclassic model, economic growth over time shifts potential GDP and the ______________ gradually to the right.
A. vertical AS curve
B. vertical AD curve
C. vertical Phillips curve
D. 45 degree AD curve
Answer: A  Reference:
Explanation:
Type: Multiple Choice                   
13. In the neoclassical model, the AS curve shifts to the right over time as_______________________ and potential GDP expands.
A. the macroeconomy adjusts back to real GDP
B. productivity increases
C. the level of real output drops
D. aggregate demand increases
Answer: B  Reference:
Explanation:
Type: Multiple Choice                   
14. Over the long run, a surge in aggregate demand from a neoclassical perspective will most likely result in:
A. a rise in level of output.
B. an increase in price level.
C. downward pressure on the price level.
D. pressure for a lower level of inflation.
Answer: B  Reference:
Explanation:
Type: Multiple Choice                   
15. If a neoclassical model shows increasing wages in the economy over the long run, what else will likely occur?
A. change in government policy to decrease in aggregate demand
B. substantial short-term off-setting decrease in output
C. inflationary increase in price level
D. short-run decrease in cyclical unemployment
Answer: C  Reference:
Explanation:
Type: Multiple Choice                   
16. If an economy experiences a decrease in aggregate demand due to a decline in consumer confidence and output falls below potential GDP, which of the following is likely to occur?
A. more consumption and less saving
B. adjustment back to potential GDP
C. increase in price inflation
D. a rise in unemployment
Answer: D  Reference:
Explanation:
Type: Multiple Choice                   
17. Suppose that a rise in business confidence has led to more investment in the economy and higher levels of output. In the short-run Keynesian analysis, the rise in aggregate demand will:
A. lower unemployment.
B. cause government to lower taxes.
C. cause government to increase spending.
D. exports will drop.
Answer: A  Reference:
Explanation:
Type: Multiple Choice                   
18. From a neoclassical view, which of the following is a true statement?
A. Lower wages will cause an economy-wide increase in the price of a key input.
B. Because wages are flexible, they are unaffected by high rates of unemployment.
C. A surge in aggregate demand ends up as a rise in output, but does not increase price levels.
D. The economy cannot sustain production above its potential GDP in the long run.
Answer: D  Reference:
Explanation:
Type: Multiple Choice                   
19. Which of the following is a valid criticism of the rational expectations theory?
A. prices do not wait on events
B. the assumption seems too strong
C.  people form the most accurate possible expectations
D. adjustment of wages and prices might be quite rapid
Answer: B  Reference:
Explanation:
Type: Multiple Choice                    Category: Evaluate
20. In the neoclassical view, changes in ____________________ can only have a short-run impact on output and on unemployment.
A. wage levels
B. aggregate supply
C. aggregate demand
D. tax levels
Answer: C  Reference:
Explanation:
Type: Multiple Choice                    
21. In the long-run neoclassical view, when wages and prices are flexible, ________________________ determine the size of real GDP.
A. potential GDP and aggregate supply
B. potential GDP and aggregate demand
C. levels of output and aggregate supply
D. levels of wages and aggregate demand
Answer: A  Reference:
Explanation:
Type: Multiple Choice                   
22. The theory of _____________________ holds that people will use all information available to them to form the most accurate possible expectations about the future.
A. adaptive expectations
B. rational expectations
C. Keynesian economics
D. Neoclassical economics
Answer: B  Reference:
Explanation:
Type: Multiple Choice                   
23. At a macroeconomic level, the theory of rational expectations points out that if the ______________________ is vertical over time, then people should rationally expect this pattern.
A. GDP
B. Phillips curve
C. aggregate demand curve
D. aggregate supply curve
Answer: D  Reference:
Explanation:
Type: Multiple Choice                   
24. When a shift in ________________ occurs, rational expectations hold that its impact on output and employment will only be temporary.
A. aggregate demand
B. aggregate supply
C. wage levels
D. price levels
Answer: A  Reference:
Explanation:
Type: Multiple Choice                   
25. In the neoclassical view, the economy has a ___________________________ to move back to potential GDP.
A. rational tendency
B. tendency to be unable
C. self-correcting tendency
D. immediate tendency
Answer: C  Reference:
Explanation:
Type: Multiple Choice                   
26. After reports of the subprime mortgage crisis began to appear in the media, which of the following most likely caused housing prices to fall?
A. neoclassical theory
B. cyclical expectations
C. rational expectations
D. Keynesian theory
Answer: C  Reference:
Explanation:
Type: Multiple Choice                   
27. If the neoclassical argument that the economy always moves back to potential GDP is accepted, then which of the following will be more important?
A. encouraging higher wages
B. fighting unemployment
C. fighting recession
D. encouraging long-term growth
Answer: D  Reference:
Explanation:
Type: Multiple Choice                   
28. From a neoclassical view, which of the following is less important?
A. fighting unemployment
B. encouraging long-term growth
C. fighting inflation
D. level of potential GDP
Answer: A  Reference:
Explanation:
Type: Multiple Choice                   
29. The shape of the ______________ involves a tradeoff between unemployment and inflation.
A. aggregate demand curve
B. aggregate supply curve
C. Phillips curve
D. Keynesian demand curve
Answer: C  Reference:
Explanation:
Type: Multiple Choice                   
30. Suppose that productivity growth in an economy over a two-year period has fallen to less than 2% per year, causing a severe recession. From the neoclassical view, which of the following will be more important in these circumstances?
A. an increase in the annual unemployment rate
B. supply and demand in the labor market
C. the problem of cyclical unemployment
D. the growth rate of long-term productivity
Answer: D  Reference:
Explanation:
Type: Multiple Choice                   
31. Using a neoclassical model, what will the level of cyclical unemployment be when an economy is producing at potential GDP?
A. zero
B. never 0%
C. 1% – 3%
D. 3% – 5%
Answer: A  Reference:
Explanation:
Type: Multiple Choice                   
32. From a neoclassical perspective, which of the following would most likely be viewed as an element that underpins long-run productivity growth in the economy?
A. flexible price levels
B. flexible market forces
C. investments in human capital
D. higher unemployment
Answer: C  Reference:
Explanation:
Type: Multiple Choice                   
33. The ___________________ argument tends to view inflation as a cost that offers no offsetting gains in terms of lower unemployment?
A. market forces
B. Keynesian
C. neoclassical
D. flexible wage and price
Answer: C  Reference:
Explanation:
Type: Multiple Choice                   
34. Which of the following is most strongly supported by the Keynesian perspective of macroeconomics?
A. inflation is a price that might have to be paid to achieve lower unemployment
B. inflation offers no offsetting gains in terms of higher unemployment
C. more emphasis on economic growth and how labor markets work
D. shifts in unemployment primary determine changes in the price level
Answer: A  Reference:
Explanation:
Type: Multiple Choice                    Category: Evaluate
35. If aggregate supply is vertical, then which of the following statements must be true?
A. Aggregate demand does not affect the quantity of output.
B. Aggregate demand does not cause inflationary changes in price level.
C. Inflation will accompany any rise in output.
D. Inflation creates greater social benefits.
Answer: A  Reference:
Explanation:
Type: Multiple Choice                   
36. In order to shift the vertical supply curve to the left, which of the following would have to occur?
A. increase in productivity
B. breakdown of key market institutions
C. expansion of potential GDP
D. flexible wage and price adjustments
Answer: B  Reference:
Explanation:
Type: Multiple Choice                   
37. Referring to a Keynesian Phillips curve, a reduction in inflation is likely to cause:
A. at least a slight increase in aggregate demand.
B. a vertical Phillips curve because aggregate supply remains fixed.
C. unemployment to remain constant in the long run.
D. at least a slight increase in unemployment.
Answer: D  Reference:
Explanation:
Type: Multiple Choice                   
38. Why do neoclassical economists tend to put relatively more emphasis on long-term growth than on fighting recession?
A. price and wage stickiness is reasonable in the short run
B. government focuses more on recession and cyclical unemployment
C. standard of living is ultimately determined by long-term growth
D. upward trend of potential GDP determines the rate of inflation
Answer: C  Reference:
Explanation:
Type: Multiple Choice                   
39. A typical neoclassical aggregate supply (AS) curve ______________ and a typical neoclassical Phillips curve __________________.
A. slopes upward; slopes downward
B. is vertical; is vertical
C. is vertical; slopes downward
D. slopes upward; is vertical
Answer: B  Reference:
Explanation:
Type: Multiple Choice                   
40. A typical Keynesian aggregate supply (AS) curve _______________ and a typical Keynesian Phillips curve _____________.
A. is vertical; is vertical
B. slopes downward; slopes downward
C. slopes upward; slopes upward
D. slopes upward; slopes downward
Answer: D  Reference:
Explanation:
Type: Multiple Choice                   
           
           
41. Referring to the diagram above, complete the following sentence: Any increase in aggregate demand in the short-run will lead to:
A. an increase in output (Q1 to Q2), but it will also lead to prices increasing.
B. an increase in output (Q1 to Q2), but it will also lead to a recession.
C. a 45 degree supply curve, which will lead to increasing unemployment.
D. a 45 degree supply curve, which will lead to recession.
Answer: A  Reference:
Explanation:
Type: Multiple Choice                   
           
42. Referring to the diagram above, which of the following is a true statement?
A. The increase in supply (Q1 to Q2) may come about because of increased money supply.
B. The increase in output (Q1 to Q2) may come about because of lower levels of taxation.
C. The increase in supply (Q1 to Q2) may result from decreased government spending.
D. The increase in output (Q1 to Q2) may result from increased levels of taxation.
Answer:  B Reference:
Explanation:
Type: Multiple Choice                   
           
43. Referring to the diagram above, which of the following is a true statement?
A. Short-run increased output will lower output costs, but demand for higher profits will increase prices.
B. Higher cost levels will result because government will increase taxes as output rises.
C. Higher cost levels of increased output will force an increase in price for the product.
D. Short-run lower output costs will result because government will decrease taxes as output rises.
Answer: C  Reference:
Explanation:
Type: Multiple Choice                    
44. A vertical aggregate supply curve, where the quantity of output is consistent with many different price levels, also implies:
A. an upward sloping Phillips curve.
B. a downward sloping aggregate demand curve.
C. a vertical aggregate demand curve.
D. a vertical Phillips curve.
Answer: D  Reference:
Explanation:
Type: Multiple Choice                   
45. If aggregate supply is vertical, then aggregate demand does not affect:
A. either wages or prices.
B. the causes of inflationary changes in price level.
C. the quantity of output.
D. inflationary pressures that accompanies any rise in output.
Answer: C  Reference:
Explanation:
Type: Multiple Choice                   
 Essay Questions
1. Explain what the neoclassical perspective on macroecomics emphasizes and briefly discuss its overall theme.
The neoclassical perspective on macroeconomics emphasizes that in the long run, the economy seems to rebound back to its potential GDP and its natural rate of unemployment.
The overall theme is not that Keynesian economics is “wrong” while neoclassical economics is “right,” nor vice versa, but rather that the two approaches complement each other, with Keynesian economics more useful for analyzing the macroeconomic short run and neoclassical economics more useful for the long run.
Reference:
Explanation:
Type: Essay                   
2. Identify and briefly explain the neoclassical argument and the key building blocks of neoclassical approach.
Neoclassical economics argues that over time, the economy adjusts back to its potential GDP level of output. The neoclassical approach is based on two key building blocks. First, over the long term the expansion of potential GDP due to economic growth will determine the size of the economy. Second, even if the Keynesian assumption of price and wage stickiness is reasonable in the short run, over the longer run, levels of prices and wages will adjust in a flexible manner.
Reference:
Explanation:
Type: Essay                   
3. Briefly discuss potential GDP in the neoclassical model, including how the curve is shown, what it determines, and how it operates over time.
In the neoclassical version of the model of aggregate supply and aggregate demand, potential GDP is shown as a vertical line. A vertical AS curve means that the level of aggregate supply (or potential GDP) will determine the real GDP of the economy, regardless of the level of aggregate demand. Over time, economic growth shifts potential GDP and the vertical AS curve gradually to the right.
Reference:
Explanation:
Type: Essay                   
4. Briefly discuss the aggregate supply curve in the neoclassical model, including how the curve is drawn, what it determines, and how it operates over time.
In the neoclassical model, the aggregate supply curve is drawn as a vertical line at the level of potential GDP. If AS is vertical, then it determines the level of real output, no matter where the aggregate demand curve is drawn. Over time, the AS curve shifts to the right as productivity increases and potential GDP expands.
Reference:
Explanation:
Type: Essay                   
5. The neoclassical supply and demand model description of a short-run shift from E0 to E1 and the long-run shift from E1 to E2 is a step-by-step way of making a simple point.  Briefly discuss this point.   
The economy can’t sustain production above its potential GDP in the long run. An economy may produce above its level of potential GDP in the short run, under pressure from a surge in aggregate demand. But over the long run, that surge in aggregate demand ends up as an increase in the price level, not as a rise in output.
Reference:
Explanation:
Type: Essay                   
6. Describe the affects that a decrease in aggregate demand because of a decline in consumer confidence that leads to less consumption and more saving in relation to the aggregate demand curve and the economy.
A decrease in aggregate demand because of a decline in consumer confidence that leads to less consumption and more saving causes the original aggregate demand curve AD0 to shift back to AD1. The shift from the original equilibrium E0 to the new equilibrium E1 results in a decline in output. As output falls below potential GDP, unemployment rises.
Reference:
Explanation:
Type: Essay                   
7. Briefly explain the neoclassical view with respect to the nature of the impact of changes in aggregate demand.
In the neoclassical view, changes in aggregate demand can have a short-run impact on output and on unemployment, but only a short-run impact. In the long run, when wages and prices are flexible, potential GDP and aggregate supply determine the size of real GDP.
Reference:
Explanation:
Type: Essay                   
8. Briefly describe what the Keynesian economists’ criticism of neoclassical theory regarding adjustment from recession is.
Keynesian economists argue that if the adjustment from recession to potential GDP takes a very long time, then neoclassical theory may be more hypothetical than practical.
Reference:
Explanation:
Type: Essay                   
9. Briefly describe what the theory of rational expectations holds and how long it typically takes rational expectations to affect economic adjustments.
The theory of rational expectations holds that people form the most accurate possible expectations about the future that they can using all information available to them. In an economy where most people have rational expectations, economic adjustments may happen very quickly.
Reference:
Explanation:
Type: Essay                   
10. Describe how a neoclassical long-run aggregate supply curve will affect the Phillips curve.
A neoclassical long-run aggregate supply curve will imply a vertical shape for the Phillips curve trade-off between inflation and unemployment.
Reference:
Explanation:
Type: Essay