In the neoclassical view, wages and prices can be sticky in the short run but become flexible over longer periods.
Correct Answer
True
True. Neoclassical economists accept that wages and prices adjust slowly in the short run, for example because pay is reviewed only once or twice a year. Over time they adjust fully, which lets the economy return to potential GDP.
Category: Adjusting to Demand Shocks
Question 2
The neoclassical perspective holds that continued increases in aggregate demand can keep output above potential GDP permanently.
Correct Answer
False
False. In the neoclassical model, output above potential causes wages and costs to rise until output falls back to potential. Continued demand growth beyond potential ends up raising the price level, not long-run output.
Category: Adjusting to Demand Shocks
Question 3
Physical capital per person refers to the amount and kind of machinery and equipment available to help a worker produce goods and services.
Correct Answer
True
True. Physical capital per person measures the tools, machines and equipment each worker has to work with. Growth in it raises productivity and pushes potential GDP higher over time.
Category: Potential GDP
Question 4
Adaptive expectations theory says that people use all available information to form the most accurate possible forecasts of the future.
Correct Answer
False
False. That description fits rational expectations. Adaptive expectations theory says people look at past experience and gradually adjust their beliefs as circumstances change.
Category: Expectations
Question 5
According to the neoclassical model, a decrease in aggregate demand from potential GDP lowers the price level in the long run while real GDP returns to potential.
Correct Answer
True
True. Lower demand first reduces output and raises unemployment, then falling wages shift short-run aggregate supply right until output returns to potential. The lasting effect is a lower price level, which in practice often shows up as a lower inflation rate.
Category: Adjusting to Demand Shocks
Question 6
In the neoclassical model, unemployment above the natural rate during a recession tends to push wages up.
Correct Answer
False
False. A recession creates a surplus of workers, so wages tend to stagnate or fall. Lower wages reduce firms' costs and shift short-run aggregate supply to the right, which helps the economy return to potential.
Category: Adjusting to Demand Shocks
Question 7
Expected inflation influences the nominal interest rates that lenders charge on loans such as mortgages and car loans.
Correct Answer
True
True. Lenders build the inflation they expect into the nominal rate so that their real return is protected. That is why a rise in expected inflation tends to raise borrowing costs for major purchases.
Category: Expectations
Question 8
According to the neoclassical model, the long-run Phillips curve slopes downward, showing a permanent tradeoff between inflation and unemployment.
Correct Answer
False
False. The neoclassical long-run Phillips curve is vertical at the natural rate of unemployment, so there is no permanent tradeoff. A downward slope describes only the short-run relationship.
Category: Phillips Curve
Question 9
An upward-sloping short-run aggregate supply curve implies a short-run tradeoff between inflation and unemployment.
Correct Answer
True
True. When short-run aggregate supply slopes upward, a demand increase raises both output and the price level, lowering unemployment while raising inflation. This produces a downward-sloping short-run Phillips curve.
Category: Phillips Curve
Question 10
Neoclassical economists hold that increasing aggregate demand is the most effective way to permanently lower unemployment.
Correct Answer
False
False. Because long-run aggregate supply is vertical in their model, neoclassical economists see higher demand as lowering unemployment only temporarily. They favor labor market reforms that reduce the natural rate of unemployment instead.
Category: Phillips Curve
Question 11
Both Keynesian and neoclassical economists regard changes in aggregate demand as a useful tool for controlling inflation.
Correct Answer
True
True. Both perspectives agree that restraining aggregate demand can reduce inflation. They disagree mainly about whether raising demand is useful for ending recessions and lowering unemployment.
Category: Comparing the Models
Question 12
When an economy produces at potential GDP, its natural rate of unemployment is zero.
Correct Answer
False
False. The natural rate of unemployment includes frictional and structural unemployment, which are always present, so it is above zero. At potential GDP it is cyclical unemployment that equals zero.
Category: Phillips Curve
Question 13
Neoclassical economists recommend a stable economic environment with low inflation to support long-term growth.
Correct Answer
True
True. Neoclassical policy advice stresses low inflation, low and steady tax rates, and private investment decisions rather than fine-tuning the economy. A predictable environment encourages investment in physical capital, human capital and new technology.
Category: Neoclassical Policy
Question 14
Keynesian analysis is generally viewed as best suited to long-run questions, while neoclassical analysis is best suited to the short run.
Correct Answer
False
False. It is the reverse. Keynesian analysis, with its focus on aggregate demand and sticky prices, fits the short run, while neoclassical analysis, with its focus on potential GDP and flexible prices, fits the long run.
Category: Comparing the Models
Question 15
Critics argue that the neoclassical model offers little explanation of deep, long-lasting downturns such as the Great Depression.
Correct Answer
True
True. The neoclassical model emphasizes self-correction through flexible wages and prices. That makes it weak at explaining why unemployment can stay very high for years, as it did in the 1930s.
Category: Comparing the Models
Question 16
In the neoclassical model, a rightward shift of aggregate demand also shifts the long-run aggregate supply curve to the right.
Correct Answer
False
False. Long-run aggregate supply depends on potential GDP, which is set by labor, capital and technology, not by demand. A demand shift moves the economy along the vertical long-run supply curve to a different price level.
Category: Potential GDP
Question 17
In the neoclassical model, a positive demand shock from potential GDP lowers unemployment below the natural rate only temporarily.
Correct Answer
True
True. Higher demand raises output and cuts unemployment at first, but rising wages shift short-run supply left. Output and unemployment then return to potential and the natural rate.
Category: Phillips Curve
Question 18
The neoclassical perspective holds that an economy in recession needs government action to return to potential GDP.
Correct Answer
False
False. The neoclassical perspective holds that flexible wages and prices let the economy correct itself over time. In this view, policy could at most speed up that adjustment.
Category: Neoclassical Policy
Question 19
The implementation lag is the time it takes, after a fiscal policy bill becomes law, for the funds to reach the agencies that will carry out the programs.
Correct Answer
True
True. Even after a tax or spending bill passes, money has to be disbursed and projects started before the policy does anything. This implementation lag follows the recognition lag, the time to see that a recession has begun, and the legislative lag, the time to pass the bill.
Category: Policy Lags
Question 20
The Keynesian model treats aggregate supply as the main driver of short-run business cycles.
Correct Answer
False
False. The Keynesian model treats shifts in aggregate demand as a main cause of business cycles, with sticky wages and prices letting those shifts change output. It is the neoclassical model that emphasizes aggregate supply.
Category: Comparing the Models