Trevor Woodworth Ch. 11 #9:Increased oil prices meant increase in marginal cost of production. Therefore a supply shock would decrease the aggregate supply. This leads to higher unemployment and higher price level. The aggregate supply determines the output and the aggregate price level. Ch. 11 #10:Reductions in tax rates for the new classical model have fairly small effects if they are only temporary because people can adapt. On the other hand if the cuts are permanent then there is a huge macroeconomic effect because different variables such as consumption and investment willbe changed. Less taxes typically mean increased consumption, but with more money in the handsof individuals, inflation would most likely increase. Ch. 12 #6:Wages certainly vary even when skills are identical when the labor market is competitive. Wages are issued on the grounds of efficiency. This means that workers are incentivized to work more efficiently so that they may be granted higher real wage. This is consistent with the efficiency wage model. Ch. 12 #9:Keynesians were mainly focused on unemployment but the New Keynesians are interested in economic growth, although they both oppose the classical school of thought. The New Keynesians tried to improve upon the old model. New Keynesian models assume that there is imperfect competition in the market for products whereas the Keyensians assumed perfect competition. They also believed in wage rigidity but the new Keynesian models are focused on price rigidity. The first model described rigid nominal variables but the new one describes
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