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UB HIS 161 - Chapter 7

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Chapter 7 – Classical and Keynesian Macro Analyses______1. The classical model assumesa. prices and wages are constant.b. pure competition.c. people suffer from money illusion.d. altruism is the main motivating force._______2. In the classical model, savinga. is an injection into the income stream.b. and investment are determined by national disposable income.c. causes unemployment.d. is a leakage from the circular flow.______3. In the classical model, when households save,a. that money becomes a part of the supply of saving curve.b. business investment offsets such saving.c. full employment will still prevail.d. All of the aboveT F 4. In the classical model a decrease in consumption will be offset by an increase in Investment spending so that RGDP will not change.5. Saving represents a(n) ________________ curve. Investment represents a(n) ___________ curve. In the classical model, desired household saving and desired business investment are equated by the __________________ rate. If Consumption falls then Savings _________, The supply of credit ____ which causes the interest rate to _______, which causes Investment to _____ until Y = ______. In addition future GDP will be ___________.6. In the classical model, the LRAS curve is (horizontal, vertical). Therefore, changes in the AD curve lead to changes in ___________________ but since wages change ___________ it does not lead to changes in ______________________.7. If much unused capacity and massive unemployment exist, the economy will be operating in the ______________________ range of the SRAS curve. In this range, prices and wage rates are (fixed, flexible). Hence, increases in aggregate demand will lead to increases in __________________ but no changes in the ________________. In that range, real GDP is said to be ___________________ determined. 8. For the most part, The short-run aggregate supply curve is _________________ sloped. This is because changes in production costs _______________changes in the price level, profitability ____________ and producers will have an incentive to produce (more, less) as the price level rises. 9. At very high price levels, the SRAS curve becomes very (flat, steep) because it becomes (more difficult, easier) to get more labor at relatively fixed wage rates. 10. If wage rates fall, the short-run AS curve will shift to the __________ while LRAS is ____________. If technological improvements occur and if the prices of raw materials fall permanently, the long-run AS curve and SRAS will shift to the _____________________.11. Assuming the economy is operating at equilibrium, predict what happens to the equilibrium price level and equilibrium real GDP as a result of : a. an increase in the labor participation rates; SR RGDP GDP ____ PL _______ Unemployment_______ point ____LR RGDP_______ PL______, Unemployment ______ point ______b. a temporary rise in raw material prices; SR RGDP GDP ____ PL _______ Unemployment_____ point ____ This is called ________________LR RGDP_______ PL______ Unemployment_______ point ______c. a decrease in government spending; SR RGDP GDP ____ PL _______Unemployment_____ point ____LR RGDP_______ PL______ Unemployment______ point ______d. a rise in Consumption spending due to stock market boom. SR RGDP GDP ____ PL _______Unemployment______ point ____LR RGDP_______ PL______Unemployment______ point ______14. T F A demand shock that shifts the AD curve rightward will probably cause real GDP to rise and the pricelevel to fall in the short run.13. T F If a nation’s exchange rate weakens, its SRAS curve will shift leftward, its AD curve will shift rightward, and its price level will


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UB HIS 161 - Chapter 7

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