QUESTION 2 Which of the following statements is consistent with what happened du
ID: 1169427 • Letter: Q
Question
QUESTION 2
Which of the following statements is consistent with what happened during the Great Recession?
Aggregate demand and long-run aggregate supply decreased, causing unemployment to rise to 10%.
Aggregate demand and short-run aggregate supply increased, causing potential GDP to decrease.
Housing prices fell during the Great Recession, causing a decrease in consumer wealth. This decrease in wealth led to a decrease in aggregate supply and a decrease in potential GDP.
Consumer sentiment fell prior to and during the Great Recession, leading to a decline in expected income that decreased the aggregate supply curve.
13.5 points
QUESTION 3
Which of the following statements is consistent with what happened during the Great Depression?
The Great Depression had an unemployment rate greater than the Great Recession that was largely due to a decrease in aggregate supply.
The unemployment rate was over 25% at the height of the Great Depression. This spike in unemployment was caused by the large decrease in aggregate demand.
It took four years for potential GDP to return to its pre-Depression level after the Great Depression.
Faulty macroeconomic policies were not a part of the cause of the Great Depression.
13.5 points
QUESTION 4
According to classical economics, a decrease in aggregate demand causes the price level to _____________ in the long run. On the other hand, an increase in aggregate demand causes the price level to _____________ in the long run. These changes occur because of _____________.
increase; decrease; government intervention
increase; decrease; price flexibility
decrease; increase; government intervention
decrease; increase; price flexibility
13.5 points
QUESTION 5
According to Keynesian economists, prices tend to be ______________. As a result, Keynesian economists focus on _____________ changes and aggregate ____________.
flexible; long-run; demand
flexible; short-run; supply
sticky; short-run; demand
sticky; long-run; supply
13.5 points
QUESTION 6
How many months did the Great Recession last?
1.5
6
18
48
13.5 points
QUESTION 7
Identify whether the following statement is more likely to come from a classical economist or a Keynesian economist.
“The recent decline in consumer confidence will likely spell disaster for the economy.”
Keynesian
classical
13.5 points
QUESTION 8
Identify whether the following statement is more likely to come from a classical economist or a Keynesian economist.
“There is no reason to believe that most prices will take more than several months to adjust in either direction.”
Keynesian
classical
Aggregate demand and long-run aggregate supply decreased, causing unemployment to rise to 10%.
Aggregate demand and short-run aggregate supply increased, causing potential GDP to decrease.
Housing prices fell during the Great Recession, causing a decrease in consumer wealth. This decrease in wealth led to a decrease in aggregate supply and a decrease in potential GDP.
Consumer sentiment fell prior to and during the Great Recession, leading to a decline in expected income that decreased the aggregate supply curve.
Explanation / Answer
(Q 2) 1st statement is correct.
Rest statements are describing effects of lower demand as effec of lower supply.
(Q 3) 2nd statement is correct.
Large unemployment is caused by a fall in demand, which forces producers to cut off output and reduce labor force. Unemployment during depression is higher than that during recession.
(Q 4) 4th statement is correct.
Classical theory claims that prices are flexible, so reduced demand decrease prices and increased demand increases prices in long run.
(Q 5) 3rd statement is correct.
Keynesians claim that prices are sticky in short run, so they focus on theories explaining aggregate demand in short run.
(Q 6) 18 months
(Q 7) Keynesian.
The Keynesian view says prices are sticky in short run, so any event affecting the demand will be unable to change the price in short term, resulting in disequilibrium.
(Q 8) Classical.
The classical view claims that prices are very flexible and adjusts to economic shocks very quickly. It does not take long time to adjust.