Question

Q11.7: Explain why the short-run aggregate supply curve might be vertical in the neoclassical zone of the SRA. How might we tell if we are in the neoclassical zone of the AS? Q12.1 In a Keynesian framework, using an AD/AS diagram, which of the following government policy choices offer a possible solution to recession? Which offer a possible solution to inflation? a. A tax increase on consumer income. b. A surge in military spending. c. A reduction in taxes for businesses that increase investment. d. A major in increase in what the U.S. government spends on healthcare. Q12.2 List three practical problems with the Keynesian perspective. Q12.3 From a Keynesian point of view, which is more likely to cause a recession: aggregate demand or aggregate supply, and why? Q12.4 Why do sticky wages and prices increase the impact of an economic downturn on unemployment and recession? Q12.5 What tradeoff is shown by a Phillips curve? Q12.6 Explain what types of policies the federal government may have implemented to restore aggregate demand and the potential obstacles policymakers may have encounters. Q13.1 What is the difference between rational expectations and adaptive expectations? Q13.2 Do neoclassical economists tend to focus more on long term economic growth or on recessions? Explain briefly. Q13.3 When the economy is experiencing a recession, why would a neoclassical economist be unlikely to argue for aggressive policy to stimulate aggregate demand and return the economy to full employment? Explain your answer. Q13.4 If most people have rational expectations, how long will recessions last? Q13.5 Summarize the differences between the Keynesian and Classical Viewpoint of the economy.

Answer 1

ans 11.7

The neoclassical region of the Short- Run Aggregate Supply curve is the near-erect part on the right-hand side. If the Aggregate Demand curve crosses this part of the Short- Run Aggregate Supply curve where output is at / near the potential Gross Domestic Product then the magnitude of potential Gross Domestic Product very nearly determines the output level in the economy. Since the equilibrium is close to the potential Gross Domestic Product , cyclical unemployment is at low levels in this economy, though structural unemployment may be a cause for concern.

In the neoclassical region, movements of Aggregate Demand to the right /to the left have low impact on the output level/ employment level. The only method to augment the magnitude of the actual Gross Domestic Product in the neoclassical region is for Aggregate Supply to move to the right. But, movements in Aggregate Demand in the neoclassical region will lead to pressures to alter the level of price.