Chapter 26: Q.12RQ (page 642)
Do neoclassical economists see a value in tolerating a little more inflation if it brings additional economic output? Explain your answer.
Neoclassical economists do not see a value in tolerating a little more inflation if it brings additional economic output.
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The legislation proposes that the government should use macroeconomic policy to achieve an unemployment rate of zero per cent, by increasing aggregate demand for as much and as long as necessary to accomplish this goal. From a neoclassical perspective, how will this policy affect output and the price level in the short run and in the long run? Sketch an aggregate demand/aggregate supply diagram to illustrate your answer.
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.
What is the shape of the neoclassical long-run Phillips curve? What assumptions do economists make that lead to this shape.
If aggregate supply is vertical, what role does aggregate demand play in determining output? In determining the price level?
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?
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