According to classical macroeconomists prices adjust

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54. According to classical macroeconomists, prices adjust _____ to shocks, so the government should _____. (a) slowly; do little (b) rapidly; do little (c) rapidly; fight recessions (d) slowly; fight recessions Answer: B Level of difficulty: 1 Section: 8.4 55. According to Keynesian macroeconomists, prices adjust _____ to shocks, so the government should _____. 56. In the long run, an increase in productivity would cause output to _____ and the aggregate price level to _____. 57. In the long run, a reduction in labor supply would cause output to _____ and the aggregate price level to _____. 58. The key difference between classical and Keynesian macroeconomists is their differing beliefs about (a) the slope of the aggregate demand curve. (b) the speed at which prices adjust. (c) the natural rate of unemployment. (d) the full-employment level of output. Answer: B Level of difficulty: 1 Section: 8.4
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130 Abel/Bernanke • Macroeconomics, Fifth Edition T Essay Questions 1. Describe the major features of the business cycle. Be sure to discuss what variables are affected by the cycle, a description of the key features that are apparent in the data, how variables are related to one another, how regular the cycle is, and how predictable the cycle is. Answer: The business cycle is defined as a fluctuation of aggregate economic activity. There are recurrent but not periodic movements of aggregate activity, with many variables moving in the same direction at the same time (comovement). Increases in aggregate economic activity are expansions, while reductions in aggregate economic activity are contractions, or recessions. Both expansions and contractions exhibit persistence, so once an expansion or contraction begins, it tends to last some time. Level of difficulty: 1 Section: 8.1 2. When a recession occurs, do economists expect it to be a temporary phenomenon? Or is there some degree of permanence? What is the empirical evidence? Answer: Recent research suggests that recessions may contain permanent components. Some economists argued that only the 1973–1975 recession led to a permanent change in the U.S. economy, because it changed the economy’s use of oil permanently. Other studies suggest that perhaps 30% of changes in real output are permanent and 70% are temporary for the postwar United States. Level of difficulty: 1 Section: 8.1 3. How has the severity and duration of business cycles changed over time in the United States? Answer: Though it is a controversial subject, it appears that business cycles have become less severe over time. Recessions have certainly been shorter since World War II than they were before 1929. There is some disagreement about how severe they were before 1929, with Christina Romer arguing that measurement problems in the old data misled economists about how severe those recessions were. But others find that the old data is
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