L7 Practice (ECON 2301) – Flashcards
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According to the Classical Theory, the level of water in the "Bathtub" remains constant because the amount of injection of investment is equal to the leakage of ____________.
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Savings
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In the 1930's "bad psychology" in the business sector overwhelmed the attractiveness of lower interest rates and caused businesses to avoid borrowing money for Investment when they already had too much ___________ relative to AD.
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capacity
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n the Great Depression, spending on U.S. _________was reduced by foreign countries as well as U.S. spending on their products which made the downward spiral even worse on a global basis.
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exports
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Classical Economics assumes that businesses do not hold ____________
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savings
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In this example of the Classical adjustment process, the Real Spending GDP _________ drop below the "full employment" level of $5000 billion.
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does not or may briefly
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Adam Smith's explanations of national economic living standards became known as the ___________ Theory.
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classical
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In the Classical Theory, it is the price-wage-interest rate _____________ that restores the economy to full employment if Household or Business spending declines.
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flexibility
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In the Classical Theory, savings is linked to investment through a _________ interest rate.
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flexible
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In the Classical stage of the figure below, a decrease in Aggregate Demand will only result in a movement _____________ along the Aggregate Supply line with a corresponding change in prices.
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downward
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In this example of a Classical adjustment to declining Aggregate Demand, there would be _____________ controversy among today's economists regarding the adjustment process and the actual outcome of that adjustment process.
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considerable
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In the Classical Bathtub Model the level of the water in the tub represents the working economy of ______________ earning income and creating output.
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employment
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A Bathtub model of the start of the Great Depression would show the water level becoming lower with Investment inflow being less than Savings leakage and, therefore, quantity of AD being ______________ quantity of AS.
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less than
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In the depression of the 1930's as more people lost their jobs and less income was earned, _____________ spending continued to fall which reduced economic activity even further.
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consumption
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In this example of the Classical adjustment process, employment will tend to be maintained at the "full employment" level of _________ million people
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120
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The essence of the work of __________________ was translated to mean, supply creates its own demand.
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Jean-Baptiste Say
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In the Classical Theory the Aggregate Demand is composed of only Consumption plus _______________ spending, but is still the total amount of demand available at various price levels.
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Investment
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In the 1930's the self correcting mechanisms initially provided by flexible ________________ did not seem to restore the economy, but some economists thought they still could have with more time and less government intervention.
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wages, prices, interest rates
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In this example of the Classical adjustment process, the recession is avoided when _______________________________ is increased by $100 billion which effectively offsets the decline in Business Investment spending.
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consumption spending by household
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The Classical Theory is based on the assumption that an economy has ______________ or, if nudged away, quickly returns to that condition.
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full employment
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IE 7-1 ... AS/AD Model - Assume the Real GDP for the moment is composed of a $3900 b Private Sector and a $1000 b Public Sector after "I" spending has decreased by $100 b in this economy. According to the Classical Model (Leakage / Injection Approach), "C" spending will now ____________________
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increase by $100 b - prevents a Recession
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IE 7-2 ... AS/AD Model - Suppose this economy was initially at Full Employment, but then experienced a $500 b left shift of AD. According to Classical Theory, the surplus of __________ unsold units will drive the Price Level down to $1.80 and in the Business Cycle the economy will return to the horizontal path from Point "x" toward Point _________ .
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250 b ... "z" (Full Employment)
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IE 7-3 ... Business Cycle Diagram - If this economy is presently positioned on a horizontal path from Point "x" toward Point "z" (as viewed by the Classical Model), then one Risk is _______________________ . The corresponding AS/AD Model has moved from a Price Level of $1.99 to $2.00, but an Uncertainty that remains is the _______________ .
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Lack of long term Growth ... Equitable distribution of income
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IE 7-4 ... AS/AD Model - If this economy moves from Year 0 to Year 1, then the Unemployment Rate will be _______ and the Inflation Rate for that twelve month period is ________ .
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8% -2.6% (not sure)
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IE 7-5 ... AS/AD Model - If this economy moves from Year 3 to Year 6, then the Unemployment Rate in Year 6 will be _______ and the average Inflation Rate for that 36 month period is ________ . Assume the Labor Force has grown from 125 to 133 million during those 3 years. 3.8% ... 0%
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3.8% 0
