Question 1

The new classical economists hold that rational expectations and adaptive expectations by businesses and households are important factors standing in the way of the federal government's success in managing the economy.

Accepted Answer

New classical economists argue that rational expectations by individuals and businesses make it difficult for government policy to systematically manage the economy, as people will anticipate the effects of policy changes and adjust their behavior accordingly, often offsetting the intended effects of those policies.

Question 2

The argument that individual decision making in businesses and households affects the macroeconomy is part of new Keynesian economics.

Accepted Answer

New Keynesian economics emphasizes that individual decisions—such as those regarding spending, investment, and pricing—aggregate up to influence broader economic outcomes, including inflation, output, and employment, thus affecting the macroeconomy.

Question 3

Supply-side economics was popular during the presidential administration of Bill Clinton.

Accepted Answer

Supply-side economics was most closely associated with the presidency of Ronald Reagan in the 1980s, not Bill Clinton. Clinton's economic policies focused more on a balanced budget, fiscal responsibility, and investment in social programs.

Question 4

The position that wage and price flexibility will bring the economy to the desired level of output is shared by the classical school and the new classical school.

Accepted Answer

Both the classical school and the new classical school of economics believe that the economy is self-regulating and that wage and price flexibility will naturally adjust to bring the economy to its full employment level of output, without the need for government intervention.

Question 5

The position that classical economics and Keynesian economics were both correct is advocated by the monetarist school.

Accepted Answer

Monetarist economics, founded by Milton Friedman, primarily focuses on the role of government in controlling the amount of money in circulation. While it shares some views with classical economics, particularly in terms of long-term market efficiency, it significantly diverges from Keynesian economics on the effectiveness of fiscal policy and the role of government intervention. Monetarists argue for a more controlled approach to monetary policy, rather than the active fiscal policy and government intervention advocated by Keynesians.

Question 6

In the U.S., the rate of inflation associated with any given rate of unemployment was typically lower in the late 1990s and early 2000s than it was in the late 1970s and early1980s.

Accepted Answer

During the late 1990s and early 2000s, the U.S. experienced a period of low inflation and relatively low unemployment, a contrast to the late 1970s and early 1980s when high inflation rates were accompanied by high unemployment, a phenomenon known as stagflation.

Question 7

Fewer teenagers in the labor force would cause a lower rate of unemployment to accompany any given rate of inflation.

Accepted Answer

A decrease in the number of teenagers in the labor force can lead to a lower unemployment rate because teenagers often have higher unemployment rates. With fewer teenagers, the overall unemployment rate may decrease, affecting the relationship between unemployment and inflation.

Question 8

How might the values of a model builder affect the assumptions on which the model is built?

Accepted Answer

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Question 9

Explain why classical and new classical economists think the economy can bring itself to a desirable level of output without government intervention.

Accepted Answer

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Question 10

Explain why Keynesian and new Keynesian economists do not think an economy can be relied upon to bring itself to full employment.

Accepted Answer

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Question 11

How do Keynesian and new Keynesian economists differ from classical and new classical economists in their views on the proper role of government in the macroeconomy?

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Question 12

According to the classical economists, how would the behavior of wages and prices ensure that the economy operates at full employment?

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Question 13

How does the aggregate supply curve appear in the classical economic model, and what assumption of the model causes it to appear as it does?

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Question 14

Explain how the Great Depression weakened the popularity of classical economics and opened the way to Keynesian economics.

Accepted Answer

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Question 15

What role do inventories play in the Keynesian model?

Accepted Answer

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Question 16

How, in the Keynesian model, does the relationship between injections into, and leakages from, the spending stream determine whether an economy is operating above or below its equilibrium level of output?

Accepted Answer

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Question 17

What are the interest rate effect, the wealth effect, and the foreign trade effect, and what is their impact on aggregate demand in new classical economics?

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Question 18

What are rational expectations and adaptive expectations, and how could they distort the effects of government macroeconomic policies?

Accepted Answer

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Question 19

What role do profit-maximizing efforts by businesses play in new Keynesian economics?

Accepted Answer

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Question 20

Why would you expect it to be more difficult to carry out macroeconomic policies in an open economy than in a closed economy?

Accepted Answer

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Quiz 9: Macroeconomic Viewpoints and Models