lesson 7 quiz - 1. Economics began as a field of study in...

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1. Economics began as a field of study in 1776 with the publication of An Inquiry into the Wealth of Nations by Adam Smith 2. According to Say’s Law: If production is created then there will be sufficient funds from this creation to purchase everything that is produced 3. According to Classical Theory, an economy is assumed to always be at full employment (or very quickly returning to that level). 4. In the Classical Theory, if Households decrease their spending then Businesses will reduce product prices, but will also decrease wages 5. Classical Theory assumes that the economy is capable of adjusting itself to full employment without government 6. In the Classical stage of the figure below, a decrease in Aggregate Demand will only result in a movement downward along the Aggregate Supply line with a corresponding change in prices. 7. In the 1930’s Classical Theory was unable to explain the continuing reductions in economic activity since that activity was supposed to be restored through flexible interest rates, wages and prices. 8. 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 less than quantity of AS. 9. In this example of the Classical adjustment process, a recession seems to be starting with Business Investment spending declining by 100 billion dollars because of pessimism regarding profit opportunities in the short run. 10. In this example of the Classical adjustment process, the recession is avoided when Consumption spending by Households is increased by $100 billion which effectively offsets the decline in Business Investment spending. 11. Adam Smith’s principles of economics were modified in 1803 by
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This note was uploaded on 06/18/2011 for the course ECON 2302 taught by Professor Methenitis during the Fall '10 term at Richland Community College.

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lesson 7 quiz - 1. Economics began as a field of study in...

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