Contrast the classical and Keynesian views of unemployment.
What will be an ideal response?
The classical view theorizes that unemployment will not persist because prices and wages are flexible. If a temporary surplus occurs in one sector of the economy, prices of that sector’s goods will fall until the quantity demanded is brought into equilibrium with the quantity supplied again. If necessary, wages in that sector will also fluctuate in response to the change in demand, falling when demand is down and rising when demand increases.
The Keynesian view, on the other hand, believes that full employment is by no means a consistent result of the market system. Cyclical unemployment is likely to persist without intervention from the government to raise aggregate expenditures. This view counteracts the classical view by stating that wages and prices are not flexible in a downward direction. Also, saving and investment plans can be at odds and can result in fluctuations in total output, total income, employment, and the price level.
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If the rate of inflation in the economy is steady at 5 percent per year, how does the short-run Phillips curve predict that the unemployment rate will be changing, if at all? Does your answer change if inflation in the economy is 0 percent?
Illustrate your answer with a Phillips curve.
According to Keynesian theory, if equilibrium real GDP is below the full-employment level, then an increase in aggregate demand will result in which of the following changes in equilibrium?
a. Real GDP will rise, but the price level will remain constant. b. Real GDP and the price level will both rise. c. Real GDP will remain unchanged but the price level will rise. d. None of the above.
The U.S. experience during the 1980s and 1990s illustrates that
a. fiscal policy is substantially more potent than monetary policy. b. a balanced budget is essential for the achievement of price stability. c. a monetary policy that keeps the inflation rate low and steady will help promote economic stability. d. there is a trade-off between inflation and unemployment-the unemployment rate can be reduced if we are willing to tolerate higher rates of inflation.
The arithmetic difference between the nominal rate of interest and the expected rate of inflation is the
A. expected interest rate. B. real interest rate. C. implied interest rate. D. contractual interest rate.