Chapter 9. The Neoclassical Perspective
QUESTIONS AND PROBLEMS
QUESTIONS
- Does neoclassical economics focus on the long term or the short term? Explain your answer.
- Does neoclassical economics view prices and wages as sticky or flexible? Why?
- What shape is the long-run aggregate supply curve? Why does it have this shape?
- What is the difference between rational expectations and adaptive expectations?
- A neoclassical economist and a Keynesian economist are studying the economy of Vineland. It appears that Vineland is beginning to experience a mild recession with a decrease in aggregate demand. Which of these two economists would likely advocate that the government of Vineland take active measures to reverse this decline in aggregate demand? Why?
- Explain why the neoclassical economists believe that the government does not need to do much about unemployment. Do you agree or disagree? Explain.
- Do neoclassical economists tend to focus more on long term economic growth or on recessions? Explain briefly.
- Do neoclassical economists see a value in tolerating a little more inflation if it brings additional economic output? Explain your answer.
- If aggregate supply is vertical, what role does aggregate demand play in determining output? In determining the price level?
- What is the shape of the neoclassical long-run Phillips curve? What assumptions do economists make that lead to this shape?
- What tradeoff does a Phillips curve show?
- Do you think the Phillips curve is a useful tool for analyzing the economy today? Why or why not?
- 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.
- If the economy is suffering through a rampant inflationary period, would a Keynesian economist advocate for stabilization policy that involves higher taxes and higher interest rates? Explain your answer.
- Economists from all theoretical persuasions criticized the American Recovery and Reinvestment Act. The “Stimulus Package” was arguably a Keynesian measure so why would a Keynesian economist be critical of it? Why would neoclassical economists be critical?
- Use table below to answer the following questions.
| Price Level | Aggregate Supply | Aggregate Demand |
|---|---|---|
| 90 | 3,000 | 3,500 |
| 95 | 3,000 | 3,000 |
| 100 | 3,000 | 2,500 |
| 105 | 3,000 | 2,200 |
| 110 | 3,000 | 2,100 |
- Sketch an aggregate supply and aggregate demand diagram.
- What is the equilibrium output and price level?
- If aggregate demand shifts right, what is equilibrium output?
- If aggregate demand shifts left, what is equilibrium output?
- In this scenario, would you suggest using aggregate demand to alter the level of output or to control any inflationary increases in the price level?
