Supply-side economic policies are sometimes referred to as: Which of the following policies best describes supply-side fiscal policy? Chapter 18 quiz Question 1 1 out of 1 points Classical economists believed that: Selected Answer: C. wages and prices were flexible, and as a result, the aggregate supply curve was vertical. *Which of the following is an example of contractionary monetary policy? $14 trillion minus $13 trillion = $1 trillion, the difference between actual and potential Real GDP, In this graph, actual economic output can be found at, at point b: which is a Real GDP of Q2 and a Price Level of P2. *An economy is facing moderate output growth but significantly high inflation rates. When inflation is growing faster and faster, unemployment is near its lows, and prices are rising quickly, the major problem with expansionary gaps is that. Basics of Keynesian Economics . Classical economists believe that the economy is self-correcting, which means that when a recession occurs, it needs no help from anyone. the use of government spending, taxes and transfer payments to influence aggregate demand. ? Increasing individual tax rates through fiscal policy will most likely have what following effect on the economy? Maintain full employment, keep inflation under control, drive economic growth. Answers: A. rational expectations are held by most of the public. Companies, who answer to shareholders, are forced to raise prices for goods & services, and when this happens throughout the economy, we have inflation - a sustained rise in prices. aggregate demand is more significant than aggregate supply the economy needs help in moving back to full employment Question 50 Keynesian economists believe that the long run is more important than the short run. What does a contractionary gap indicate about output in the short-run? Classical economists believe that prices are sticky. Why? Combating a recession using expansionary fiscal policy. Although the term has been used (and abused) to describe many things over the years, six principal tenets seem central to Keynesianism. If the economy is suffering from extremely high rates of inflation, which of the following fiscal policies would be appropriate from the standpoint of a classical economist? It is the natural market solution to problems like recession, unemployment, etc... Why do classical economists not like to focus monetary or money solutions? John Maynard Keynes (1883-1946) was a British economist educated at the University of Cambridge. These core tenets of classical liberalism can be seen in the areas of economics, government, politics, and sociology. D. Key Terms Which of the following fiscal methods would most likely be used during periods of slow or negative economic growth? They believe such things only distract us from real variables. C. short-run goals are more important than long-run goals. What do classical economists think of unemployment? the Federal Reserve's announcement that it will steadily raise the federal funds rate. So that's the Classical Model. How will the following variables be affected? the short run is more significant than the long run. *'Crowding out' refers to which of the following? Adam Smith created the concepts that later writers call the classical theory of economics. Classical economics places little emphasis on the use of fiscal policy to manage aggregate demand. How do Keynesian economists feel about growth and monetary policy? higher interest rates that decrease private investment. Which of the following policy actions can the Federal Reserve use to address this problem? The Keynesian Model Fiscal Policy. Expert Answer 100% (1 rating) Previous question Next question Get more help from Chegg. Suppose the President plans to cut taxes for consumers and also plans to increase defense spending. Thomas. Which of the following policies will most likely stimulate economic growth? Classical economists believe that the economy is self-correcting, which means that when a recession occurs, it needs no help from anyone. Can be affected by only monetary policy. Classical theory assumptions include the beliefs that markets self-regulate, prices are flexible for goods and wages, supply creates its own demand, and there is equality between savings and investments. Classical Versus Keynesian Economics: Definition of Classical and Keynesian Economists: The economists who generally oppose government intervention in the functioning of aggregate economy are named as classical economists. it involves a change in the size of the money supply, The economy has entered a recession with high unemployment. * All of the following are true about fiscal policy except what? When the Federal Reserve lowers the discount rate, what will happen? a. there would always be an excess of saving over investment. *Which of the following will lower inflationary expectations? New classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. An 'expansionary gap' is sometimes referred to as an 'inflationary gap' because, when actual output exceeds its long-run potential, inflation is the result, To calculate the size of an expansionary gap, economists, subtract the long-run level of output from the actual (current) level of output (actual minus potential). the short run is more significant than the long run. Long answer: Classical Economics is based off of the pre-Keynesian, Industrial Age-era ideology that the capitalist economy is self-regulating. aggregate demand is more significant than aggregate supply the economy needs help in moving back to full employment Question 50 Keynesian economists believe that the long run is more important than the short run. lower tax rates provide positive work incentives and increases aggregate supply. One of the reasons classical economists hold this view is because they believe that economic fluctuations are to be expected and that they are the natural by-product of people freely making … 2. If the supply is high and there is inadequate demand for it, it is a temporary situation. Its main tools are government spending on infrastructure, unemployment benefits, and education. The classical economists believed that the leakage of saving would be matched by the injection of business investment. In a free market, self-interest works like an invisible hand guiding the economy. Fiscal Policy. The prices for the commodity in question, decrease, to equate the demand and supply and bring the situation back to equilibrium. B, Say, David Ricardo, J. S. Mill. the economy can adjust back to full employment on its own. - Believed that if markets worked freely then the economy would prosper. Classical liberalism is a political and economic ideology that advocates the protection of civil liberties and laissez-faire economic freedom by limiting the power of the central government. - Classicalists assumed that if the economy was left to itself then it would tend to full employment equilibrium. New classical macroeconomics strives to provide neoclassical microeconomic … When there is a downside gap between actual equilibrium real GDP and the full-employment level of real GDP, economists refer to this is as: Which of the following is not true regarding contractionary gaps? 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