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Econ 1720 Spring 19 Date: 11/13/2023 Name: Ayse Aydan YETKIN Course: Econ 1720 Section: 91 Chapter 26 Questions The following are for your study review the following items and be prepared to give a brief explanation of each one: (Need not be included in the assignment.) Says Law The General Theory of employment, interest, and money full employment GDP potential GDP Aggregate demand curve Aggregate supply curve Please list and answer the following questions: Q1. Distinguish between neoclassical and Keynesian economists. (In some texts neoclassical is referred to as monetarist.) The neoclassical model, with its emphasis on aggregate supply, focuses on the underlying determinants of output and employment in markets, and thus tends to put more emphasis on economic growth and how labor markets work. However, the neoclassical view is not especially helpful in explaining why unemployment moves up and down over short time horizons of a few years. Nor is the neoclassical model especially helpful when the economy is mired in an especially deep and long-lasting recession, like the Great Depression of the 1930s. Neoclassicals believe that the economy is self-correcting, and attempting to fine-tune the economy through monetary and fiscal policies makes problems worse.

Econ 1720 Spring 19 Keynesian economics tends to view inflation as a price that might sometimes be paid for lower unemployment; neoclassical economics tends to view inflation as a cost that offers no offsetting gains in terms of lower unemployment. Keynesians believe fiscal and monetary policy should be used actively in the short run to manage aggregate demand. Q2. What are the factors that make up the AD curve? Consumption spending, Investment spending, Government spending, Spending on exports minus imports Q3. How do changes in private investment affect the AD curve? Changes in investment shift the aggregate demand curve to the right or left by an amount equal to the initial change in investment times the multiplier . Q4. What are two factors that cause the AS curve to shift? Productivity Input Prices Q5. What effect does a reduction in taxes have on the AD curve? A reduction in income tax rates, will increase investment and shift the aggregate demand curve to the right. Q6. What effect does a reduction in taxes have on the AS curve? A reduction in the income tax rate rotates the aggregate expenditures curve upward by an amount equal to the initial increase in consumption created by the lower tax rate. Q7. Considering what you know about the current levels of nonfarm payroll and unemployment, in what area of the AD-AS curve is the U.S. economy? Explain why this is the case? Non-farm payroll refers to an economic figure illustrating the number of jobs in the U.S added in specific sectors. According to the AS-AD curve, a combination of an increase in unemployment and a decrease in NFP will cause the AS curve to shift to the left, a state usually called stagflation. On the other hand, the aggregate demand curve tends to adjust to the left, indicating a decline in demand. When the AD curve shifts to the right, consumption, government, and investment spending have risen.

Econ 1720 Spring 19 Q8. Suppose the economy is at full potential and the federal government institutes a policy of fiscal stimulus to the economy? What is the result in output? What is the result in the price level? (Remember in the short run we can produce beyond potential GDP, but in the long run, we will get a price level adjustment.) The expected price level rises. These questions are copyrighted. Sharing without permission is not permitted. © Peter Lawson

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