answer 8 - Econ 162-A1, A2 Fall 2015 Kenny Christianson...

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Econ 162-A1, A2Kenny ChristiansonFall 2015due:November 20ANSWER KEY --PROBLEM SET NUMBER EIGHT1. a.The economy is like a highway in that they both have a rate of flow that tends to beconstant.Like cars on a highway tend to travel at an average speed, the economy tends to growat an average rate.If there are too many cars trying to enter the highway or if there are toomany goods being produced, then things may slow down.Usually the normal rate of speed orgrowth returns on its own.But sometimes, like the truck accident that stops traffic, the economymay also sometimes require government intervention to return to its normal speed.b.The basic results of the classical model is that wages and prices are free to adjust. so thatmarkets can clear and bring the economy to full employment on its own without help from thegovernment.c.Keynes believed that the economy may be stuck below potential for a significant amount

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