Question 1

Which of the following is NOT an assumption of the classical model?
A) Wages and prices are flexible.
B) Inflation will lead to money illusion.
C) People are motivated by self-interest.
D) Pure competition exists.

Accepted Answer

The classical model assumes that people have rational expectations and will not be deceived by inflation. Money illusion is a violation of the assumption of rational expectations, and therefore, it is not included in the classical model.

Question 2

The condition of fully flexible wages and prices was assumed by
A) the classical economists.
B) the Keynesian economists.
C) modern economists.
D) no economists.

Accepted Answer

The assumption of fully flexible wages and prices is a core principle of classical economics, which emphasizes the self-correcting nature of markets and the importance of laissez-faire policies. Keynesian economics, on the other hand, emphasizes the role of government intervention in stabilizing the economy during periods of recession or inflation, and recognizes that wages and prices may not always adjust quickly in response to changes in demand and supply. Modern economists may incorporate elements of both classical and Keynesian thought, but neither fully embraces the assumption of fully flexible wages and prices.

Question 3

Say's law implies that
A) surpluses never occur.
B) surpluses or shortages are possible, but only for a short time.
C) shortages is a persistent phenomenon.
D) shortages never occur.

Accepted Answer

Say's law, also known as the law of markets, states that supply creates its own demand. This means that if producers produce goods and services, they will ultimately be able to sell them because the money that consumers spend on these goods and services will end up in the hands of producers. However, surpluses or shortages are still possible in the short term due to changes in production or consumption patterns. Therefore, choice B is the best answer.

Question 4

According to the classical economists, actual real GDP
A) always equals actual aggregate income.
B) sometimes equals actual aggregate income.
C) never equals actual aggregate income.
D) is not related to aggregate income.

Accepted Answer

Classical economists believe that in an economy, actual real GDP (Gross Domestic Product) always equals actual aggregate income. This is because the total value of all goods and services produced in an economy (real GDP) is equal to the total income earned by the factors of production, reflecting a fundamental principle of national income accounting.

Question 5

The concept that producing goods and services generates the means and the willingness to purchase other goods and services is
A) the Keynesian approach.
B) money illusion.
C) Say's law.
D) secular deflation.

Accepted Answer

Say's law, named after economist Jean-Baptiste Say, states that supply creates its own demand. In other words, the production of goods and services will generate the income and willingness to purchase other goods and services, leading to a continuous cycle of economic activity. This idea is in contrast to the idea of a demand-driven economy, which suggests that demand must be stimulated for economic growth to occur. Say's law is a foundation of classical economic theory.

Question 6

"Supply creates its own demand" is known as
A) Keynes' Rule.
B) Murphy's law
C) Smith's law.
D) Say's law.

Accepted Answer

Say's law, named after French economist Jean-Baptiste Say, states that the act of production generates income, which ultimately creates its own demand for goods and services. This means that supply creates its own demand, a concept that is fundamental to classical economics.

Question 7

According to the classical economists, an economy producing $10 million in goods and services
A) may be producing too much since the needs of people may not be this great.
B) simultaneously generates the income necessary to purchase $10 million in goods and services.
C) is supplying $10 million in goods and services, but could be demanding more or less than $10 million in goods and services for a very long period of time.
D) could experience a permanent surplus if no one has estimated the demand for goods and services in the economy.

Accepted Answer

According to classical economists, production generates an equivalent amount of income, so an economy producing $10 million in goods and services simultaneously generates $10 million in income necessary to purchase those goods and services. Therefore, choice B is correct. The other choices are incorrect because they do not accurately reflect classical economic theory.

Question 8

Given the assumptions of the classical model
A) the economy will often experience recessions and expansions.
B) expansion will be the normal condition, but recessions will often be severe and require government intervention.
C) the macroeconomy is erratic, and problems will often be increased over time.
D) the market is a self-correcting mechanism.

Accepted Answer

The assumption of the classical model is that the market is a self-correcting mechanism. Therefore, option D is the correct answer. Options A, B, and C are not consistent with the assumptions of the classical model.

Question 9

An assumption of the classical model is that
A) money illusion is widespread.
B) people make decisions based on nominal prices rather than real prices.
C) prices are flexible while wages are inflexible.
D) people are motivated by self-interest.

Accepted Answer

The classical model assumes that individuals act in their own self-interest, focusing on maximizing their utility or profits. This model posits that economic agents make rational decisions based on available information and their personal goals.

Question 10

According to Say's law
A) desired expenditures are always less than actual production.
B) desired production are always more than actual production.
C) desired expenditures are always equal to actual expenditures.
D) desired expenditures cannot be compared with actual expenditures.

Accepted Answer

Say's law states that supply creates its own demand, which means that the total output produced in an economy will generate enough income for all the goods and services produced, and therefore desired expenditures will always be equal to actual expenditures.

Question 11

The approach to understanding the determination of real GDP and the price level that emphasizes flexible wages and prices and competitive markets is
A) the classical model.
B) the Keynesian model.
C) Adam Smith's Law.
D) Murphy's Law.

Accepted Answer

The classical model emphasizes the role of flexible wages and prices and competitive markets in determining real GDP and the price level.

Question 12

Which of the following is NOT true according to Say's law?
A) Supply creates its own demand.
B) No overproduction is possible in a market economy in the long run.
C) Desired expenditures will always be higher than actual expenditures.
D) Producing goods and services generates the means and the willingness to purchase other goods and services.

Accepted Answer

Say's law states that supply creates its own demand and that overproduction is not possible in the long run. Producing goods and services generates the means and willingness to purchase other goods and services. However, it does not necessarily mean that desired expenditures will always be higher than actual expenditures. In fact, in a market economy, actual expenditures are determined by the level of supply and demand, which can vary depending on different factors such as consumer preferences, economic conditions, and government policies.

Question 13

Which of the following is NOT an assumption of the classical model?
A) Buyers and sellers react to changes in relative prices.
B) Households want to maximize economic well being.
C) No single buyer or seller of a commodity can affect its price.
D) Wages and prices will move freely in the upward direction but not the downward direction.

Accepted Answer

The assumption that wages and prices move freely in the upward direction but not the downward direction is part of the Keynesian model, not the classical model. The classical model assumes that wages and prices are flexible in both directions.

Question 14

Which of the following statements is NOT true about Say's law?
A) Desired expenditures will equal actual expenditures.
B) Surpluses will be eliminated by falling prices and shortages will be eliminated by increasing prices.
C) People produce more goods than they want for their own use only if they seek to trade them for other goods.
D) Markets would be regularly hit by severe shortages and surpluses.

Accepted Answer

Say's law argues that supply creates its own demand, therefore there won't be severe shortages and surpluses. Choice D is the only statement that contradicts Say's law.

Question 15

Say's law states that
A) desired expenditures will equal actual expenditures.
B) people produce only the goods they want.
C) demand is always less than supply.
D) overproduction is never possible because of limited resources.

Accepted Answer

Say's law, also known as the law of markets, states that the production of goods creates its own demand. In other words, the total amount of goods and services produced in an economy will generate enough income to purchase all of the goods and services produced. This is because when firms produce goods, they pay wages to workers and purchase inputs from other firms, which in turn increases their income and allows them to purchase desired goods and services. Therefore, desired expenditures will equal actual expenditures. This is why option A is the correct answer.

Question 16

The classical economists assumed that
A) monopoly was widespread in the economy.
B) government intervention in the economic system was necessary and helpful.
C) wages and prices were sticky in going downward.
D) wages and prices were flexible.

Accepted Answer

The classical economists believed that wages and prices were flexible and would adjust to changes in supply and demand without the need for government intervention. They believed that a free market economy would naturally reach an equilibrium where supply and demand were balanced and resources were allocated efficiently. They did not see monopoly as a widespread problem, and in fact, believed that competition was a necessary component of a healthy economy. They also believed that wages and prices were not sticky in going downward, meaning that they could adjust quickly in response to changes in market conditions.

Question 17

According to classical theory, any changes in aggregate demand will
A) lead to changes in the price level.
B) lead to changes in real Gross Domestic Product (GDP), but not in the price level.
C) lead to changes in both real Gross Domestic Product (GDP) and the price level.
D) have no affect on prices or real Gross Domestic Product (GDP).

Accepted Answer

According to classical theory, changes in aggregate demand primarily affect the price level rather than real GDP, which is determined by supply-side factors like technology and resources. The classical view holds that the economy is always at or rapidly returns to full employment, so demand changes mainly influence prices.

Question 18

According to the classical theory, the aggregate supply curve is
A) downward sloping.
B) horizontal.
C) upward sloping.
D) vertical.

Accepted Answer

According to the classical theory, the aggregate supply curve is vertical, indicating that the total output of goods and services in an economy is independent of the price level in the long run.

Question 19

Say's law implies that
A) consumers' willingness to spend is unrelated to the production of goods and services.
B) producing goods and services generates the means and the willingness to purchase other goods and services.
C) prices and wages are sticky upwards.
D) wages and prices are inflexible.

Accepted Answer

Say's law implies that the production of goods and services generates the means and the willingness to purchase other goods and services. This means that supply creates its own demand. Therefore, producing more goods and services will lead to an increase in income and purchasing power, ultimately leading to increased demand for other goods and services.

Question 20

In a classical model
A) equilibrium real GDP is supply determined.
B) equilibrium real GDP is determined by the government.
C) equilibrium real GDP is determined by both aggregate supply and aggregate demand.
D) equilibrium real GDP is neither determined by aggregate supply nor by aggregate demand.

Accepted Answer

In a classical model, equilibrium real GDP is supply determined because the classical economists believed that the economy would automatically adjust to full employment through the operation of market forces, without the need for government intervention in the form of fiscal or monetary policy. Therefore, equilibrium real GDP is determined by the level of aggregate supply.

Quiz 11: Classical and Keynesian Macro Analyses

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

The condition of fully flexible wages and prices was assumed by

Say's law implies that

According to the classical economists, actual real GDP

The concept that producing goods and services generates the means and the willingness to purchase other goods and services is

"Supply creates its own demand" is known as

According to the classical economists, an economy producing $10 million in goods and services

Given the assumptions of the classical model

An assumption of the classical model is that

According to Say's law

The approach to understanding the determination of real GDP and the price level that emphasizes flexible wages and prices and competitive markets is

Which of the following is NOT true according to Say's law?

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

Which of the following statements is NOT true about Say's law?

Say's law states that

The classical economists assumed that

According to classical theory, any changes in aggregate demand will

According to the classical theory, the aggregate supply curve is

Say's law implies that

In a classical model