Question

1. The “classical dichotomy” refers to the separation of:
(a) supply-side factors vs. demand-side factors.
(b) changes in the domestic (or closed) economy vs. changes abroad (or an open economy).
(c) short-run fluctuations vs. long-run economic growth.
(d) real vs. nominal variables.
(e) the public sector –government spending and tax revenues– vs. the private sector (C and I).

2. Which of the following does not explain the slope of the aggregate demand curve?
(a) the wealth effect.
(b) the interest-rate effect.
(c) sticky wages and sticky prices.
(d) the exchange-rate effect.
(e) decreasing utility of consumption.

3. The misperceptions theory mainly relates to:
(a) how an increase in government spending is financed –taxes or borrowing– and thus its effect on AD.
(b) one determining factor of the shape of the short-run aggregate supply.
(c) the distinction between national debt and simply the public debt and the confusion it causes.
(d) what is essentially a “broken window fallacy” issue and thus the net value of any fiscal policy action.
(e) workers not understanding fully changes in their nominal vs. changes in their real wage rates.

4. Over the business cycle, fluctuate(s) more (as percentage change) than any other
variable.
(a) inflation
(b) investment
(c) imports
(d) exports
(e) private consumption

5. Stagflation is usually thought of, or depicted by:
(a) the presence –and importance– of “animal spirits” in economies.
(b) a decrease in aggregate demand.

(c) a rise in government spending financed entirely by borrowing.
(d) falling prices for oil and other natural resources.
(e) aggregate supply shifting left (that is, decreasing)

Answer 1

Answer 1

​​​​​​The correct option is (d) real vs nominal variables.

Because classical dichotomy is an idea in which real and nominal variables can be analyzed separately. That is, real variables like output, employment are independent of monetary variables.

The other options are incorrect because

(a) supply-side factor vs. demand-side factors - supply side factor increases production drives economic growth and demand side factor leads to higher economic growth. It doesn't refer to classical dichotomy.

(b) changesin the domestic economy (or closed) vs. changes abroad ( or an open economy) -open economy is engaged in trade of products and closed economy is engaged in international trade. So, it doesn't involve in classical dichotomy.

(c) short-run fluctuations vs. long-run economic growth -short run fluctuations results in change in the output level and long run results in capital, labour and technology. Classical dichotomy is not related to short run fluctuations and long run fluctuations.

(e) the public sector- government spending and tax revenues vs. the private sector (C&I) - public sector is to provide education, heath care and infrastructure investment and private sectors is owned and managed by the private individuals and corporation. Public and private sectors are completely related to government,consumption and investment. So, it doesn't relate to classical dichotomy.