Assumpti on school of th o ught the economy na

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Assumpti on School of Th o ught The economy na turally tends toward its full-employment output level. I Classical ..t l Product pri ce s and wages are fixed or rigid. I Keynesian ..t l Product pri ce s and production cos ts are flexible and change I Classical ..t l proportionally. Explanb:tio n: Close A According to the Keynesian view, pr i ce s and wages are fi xed or ri gid when the economy operates at a less-than full-employment output level. When aggregate demand declines and output falls below full-employment real GDP, Keyneslans argue that prices and wages will not adjust downward to restore equilibrium at Full -employment output very qu i ck l y, leading to a su stained period of recession. I.f wages and prices are rigid, the only way to return the economy to Its Full -employment level of real GDP quickly Is to increase aggregate demand. According to the classical view, the economy tends toward I ts full-employment output level because product pri ces and production costs are flexible and move proportionally. If a reduction In aggregate demand causes economic output to fa ll temporarily below Its full-employment level, prices and wages will adjust downward, moving the economy back to full-employment real GDP. Poi nts: 3 3 •!• Highest: 3 /3
2. T he Keynesian an d classical views of aggr egate supply Aa Aa ffil In this tabl e, match the macroeconomic ass u mpt ions about aggregate supply to the appropriate school of though t. A ssumpt i on School of T houg ht Product prices and wages are fixed or rigid. I Keynesian ...t l On ly an Increase in aggregate demand can move an economy out of a I Keynesian ...t l recession and back to full-employment real GOP quickly. The economy naturally tends toward Its full-employment output level. I Classical ...t l Explanation: Close A According to the Keynesian view, prices and wages are fixed or rigid when the eco n omy operates at a less-than full-employment ou tput level. When aggregate demand declines and ou tput falls below full-employment real GOP, Keyneslans argue that prices and wages will not adjust downward to restore equilibrium at full-employment output very quickl y, leading to a sustained period of recession. If wages and prices are rigid, the on ly way to return the economy to Its full-employment level of real GOP quickly Is to Increase aggregate demand. According to the cl ass ical view, the economy tends toward Its fu ll -employment output level because product pri ces and production costs are flexible and move proportionally. If a reduction In aggregate demand ca u ses economic output to fa ll temporarily below I ts full-employment level, prices and wages will adjust downward, moving the economy back to fu ll -employment real GOP. Points: 3 3 3 •!• Highest: 3/3
3. Consumpt ion and sa vi ng Aa Suppose Crystal gets a sales bonus at her place of wo rk tha t gives her an ext ra $700 of disposable Income. She chooses to spend $560 and save the remaining $140. Aa a

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