Department of Economics: „Macroeconomics“, Class 2015, Summer 2016 Page 1/ 4Prof. (FH) Mag. Dr. Ferry Stocker, Mag. Nicole Lindner Macroeconomics Questionnaire #3 with solution May 3, 2016 The business cycle (short-term fluctuations) and long-term trend: The Classical and the Keynesian view Fill in the Blanks The theory that supply creates its own demand is called Say`s Law. According to Keynes, the primary cause of unemployment is deficient aggregate (= effective) demand. The classical economists did not believe that saving would lead to too little spending because they felt that all saving would be invested. In the classical model any long-term unemployment must be voluntary. In terms of the circular-flow diagram, saving is often described as leakage, whereas investment is an injection. According to Keynes, the level of output and unemployment is determined primarily by the level of aggregate demand. In the classical model the flexibility of interest rates was not the only factor ensuring full employment; flexible wages and prices provided an additional safeguard. The classical economists argued that the proper role for the government in the economy was a very limited one. According to Keynes, one way to combat unemployment is for the government to increase its spending or reduce taxes. If there is no tendency for the level of output to expand or contract, the economy must be producing the full employment level of output. Manipulating the level of government spending in order to guide the economy`s performance is one form of fiscal policy. Keynes believed that a reduction in aggregate demand would lead to lower output and employment rather than to lower prices, as the classical economists suggested. Altering the money supply in an attempt to influence the economy`s performance is termed monetary policy.