Question

1.According to classical economists,

Select one:

a. the economy moves to full employment in the long run

b. the economy is always at full employment in the short run

c. the economy is rarely at full employment

d. business cycles explain long-run fluctuations in the economy

e. the economy is at full employment in the short run, but in the long run, business cycle movements lead the economy away from full employment

2. Generous unemployment benefits

Select one:

a. reduces search effort which raises unemployment

b. reduces search effort which lowers unemployment

c. increases search effort which raises unemployment

d. increases search effort which decreases unemployment

e. None of the above

3. In an expansion,

Select one:

a. government budget deficits tend to rise

b. government budget deficits tend to fall

c. the government debt tends to rise faster than in a recession

d. government tax receipts tend to fall

e. there is pressure on the central bank to monetize the debt

4.The Keynesian model

Select one:

a. relies on the market-clearing assumption

b. is used primarily for long-run analysis

c. is used primarily for short-run analysis

d. focuses on the supply of and demand for resources

e. focuses on fluctuations in the financial markets to explain fluctuations in real GDP

5. The economy’s total stock of capital will always increase when

Select one:

a. depreciation is zero

b. investment is greater than depreciation

c. investment is greater than population growth

d. investment is positive

e. depreciation is greater than investment

Answer 1

1. According to classical economists, b. the economy is always at full employment in the short run.

The classical economists maintained that the economy would operate at its full employment output level without the need for continually falling wages and prices. Say's law assumed that the unfettered forces of free markets and laissez faire capitalism would guarantee full employment with price stability.

2. Generous unemployment benefits a. reduces search effort which raises unemployment.

Generous employment benefits keep unemployed people satisfied to some extent and hence decrease their efforts of searching actively for a job.

3. In an expansion, a. government budget deficits tend to rise.

Budget deficit is when goverment expenditures exceed its revenue. Generally, expansionary policy leads to higher budget deficits since it involves increase in government expenditures, and contractionary policy leads to budget surplus.

4.The Keynesian model c. is used primarily for short-run analysis.

Keynes' theories extensively focus on the short run since Keynes believed ' in the long run we are all dead'.

5. The economy’s total stock of capital will always increase when b. investment is greater than depreciation.