Title: Neoclassical Policy Recommendations
Course: TEST Course

Q: The vertical, long-run aggregate supply curve indicates that the long-run level of economic output is dependent upon ________.
- the price level
- government subsidies
- the stock of productive factors
A: the stock of productive factors

Q: The long-run economic level of output, according to the vertical, long-run aggregate supply curve, depends on ________.
- the price level
- an increase in aggregate demand
- technology
A: technology

Q: In the neoclassical view of the economy, expansionary fiscal policy cannot work to raise equilibrium output because
- it will raise unemployment.
- it will disincentivize production.
- flexible prices will eventually choke off any increase in aggregate demand.
A: flexible prices will eventually choke off any increase in aggregate demand.

Q: If a government expands its fiscal policy to raise equilibrium output, what will happen in the long term, according to the neoclassical view of the economy?
- It will not work because it will raise the level of unemployment.
- It will not work because it will disincentivize production.
- It will not work because the flexible prices will eventually choke off any increase in aggregate demand.
A: It will not work because the flexible prices will eventually choke off any increase in aggregate demand.

Q: If the aggregate demand in a macroeconomy increases, according to neoclassical theory, what happens to prices over the long term?
- Prices remain consistent with historic prices and are inflexible.
- Prices are sticky and do not shift quickly either in the short or the long term.
- Prices will be flexible and adjust back to equilibrium in the aggregate supply curve or potential GDP.
A: Prices will be flexible and adjust back to equilibrium in the aggregate supply curve or potential GDP.

Q: If aggregate demand decreases, neoclassical theory suggests that in the long-term, prices
- remain consistent with historic prices and are inflexible.
- are sticky and do not shift quickly either in the short or the long term.
- will be flexible and adjust back to equilibrium along the aggregate supply curve.
A: will be flexible and adjust back to equilibrium along the aggregate supply curve.

Q: Last year Canada’s economy had a surge in exports and increased demand for additional economic outputs. Because of the great demand, industry’s now have a labor shortage and wages have begun to rise. If you are looking at Canada’s macroeconomy through the lense of a neoclassical economic understanding, what you will expect to see over time?
- Wages will rise rapidly and with the increase in demand the outputs will operate above potential GDP for both the short and long term for the economy.
- Wages will be sticky and rise slowly, prices will rise rapidly and the vertical AS curve (potential GDP) will not shift to the right over the long-term.
- Wages and prices will rise in the short-term, and over the long-term they will be flexible and move to a higher equilibrium price along the vertical AS curve (potential GDP).
A: Wages and prices will rise in the short-term, and over the long-term they will be flexible and move to a higher equilibrium price along the vertical AS curve (potential GDP).

Q: This year Mexico’s economy had a decrease in exports and increased demand imports. Because of the great decrease in demand for Mexican products and services, industry’s now have a labor glut and wages have begun to drop. What would you expect to see over time in Mexico’s macroeconomy from a Neoclassical economic understanding?
- Wages will fall rapidly and with the decrease in demand for outputs it will operate below potential GDP for both the short and long term for the economy.
- Wages will be sticky and fall slowly, prices will fall rapidly and the vertical AS curve (potential GDP) will not shift to the left over the long-term.
- Wages and prices will fall in the short-term, and over the long-term they will be flexible and move back to a lower equilibrium price along the vertical AS curve (potential GDP).
A: Wages and prices will fall in the short-term, and over the long-term they will be flexible and move back to a lower equilibrium price along the vertical AS curve (potential GDP).

Q: A vertical AS curve means that changes in GDP will be caused by
- cyclical unemployment.
- changes in potential output.
- changes in aggregate demand.
A: changes in aggregate demand.

Q: According to neoclassical theory, changes in GDP, or the vertical AS curve, will be caused by
- cyclical unemployment.
- potential output changes.
- aggregate demand changes.
A: aggregate demand changes.

Q: In the neoclassical model, economic growth through technological change over time shifts potential GDP and the ________ gradually to the right.
- vertical AD curve
- vertical Phillips curve
- vertical AS curve
A: vertical AS curve

Q: In the neoclassical model, the AS curve shifts to the right over time as ________ and potential GDP expands.
- the macroeconomy adjusts back to real GDP
- the level of real output drops
- productivity increases
A: productivity increases

Q: Over the long run, a surge in aggregate demand from a neoclassical perspective will most likely result in
- a rise in level of output.
- downward pressure on the price level.
- an increase in price level.
A: an increase in price level.

Q: Which of the following factors are excluded from shifting the aggregate demand curve?
- a cut in personal income tax rates
- high consumer confidence
- increased defense spending
- an increase in the price level
A: an increase in the price level

Q: Suppose that a rise in business confidence has led to more investment in the economy and higher levels of output. In the short-run, Keynesian analysis says the rise in aggregate demand will ________ while the neoclassical model predicts ________ in the long-run.
- cause government to lower taxes; higher taxes
- cause exports to drop; that exports will drop
- cause lower unemployment; full employment
A: cause lower unemployment; full employment

Q: If a macroeconomy experiences a fall in business confidence which has led to less investment in the economy and lower levels of output. Keynesian analysis in the short-run, predicts that the fall in aggregate demand will ________, while the Neoclassical view says ________ in the long-run.
- cause government to raise taxes; lower taxes
- cause exports to increase; that exports will drop
- cause higher unemployment; there will be full employment
A: cause higher unemployment; there will be full employment

Q: The theory of rational expectations indicates that agents’ expectations change ________ and therefore ________ the effectiveness of monetary or fiscal policy.
- slowly; increase
- are based on historical information; always improve
- immediately; preclude
A: immediately; preclude

Q: If you are explaining the theory of rational expectations to a friend, you would say that the change in an agents’ expectations is ________ and therefore ________ the effectiveness of monetary or fiscal policy.
- slow; increases
- based on historic information; always improves
- immediate; precludes
A: immediate; precludes

Q: In adaptive expectations, agents ________ to make their forecasts of economic conditions.
- use both current and past information
- ignore current information and consider only the past
- ignore the past and consider only current information
A: ignore the past and consider only current information

Q: In describing what adaptive expectations means to a friend, you explain that in order to make their economic condition forecasts, agents ________.
- use both past and current information
- consider only the past and ignore current information
- consider only current information and ignore the past
A: consider only current information and ignore the past

Q: From a neoclassical perspective, which of the following would most likely be viewed as an element that undermines long-run productivity growth in the economy?
- government stimulus spending
- cyclical unemployment
- tax cuts on business capital investment
A: tax cuts on business capital investment

Q: Which of the following scenarios would most likely be viewed from a neoclassical perspective as an undermining element of the long-run productivity growth in an economy?
- stimulus spending by the government
- unemployment that is cyclical
- business capital investment tax cuts
A: business capital investment tax cuts

Q: The owner of a national software company has been watching current economic information for the past two quarters and a rapid rise in demand for its software suites. Last month 30 new software engineers were hired to meet the demand. Even though these new hires will finish their project work in a few months, the owner plans to retain them in anticipation of future demand. Why is the owner making these type of decisions for the long-run?
- The owner is using adaptive expectation reasoning to hire more engineers and be ready for future demands of a long-term economic shift.
- The owner is using aggregate expectation reasoning to hire more engineers to quickly be ready for short-term future demands.
- The owner is using rational expectation reasoning to hire more engineers to quickly be ready now for future demands of a long-term economic shift.
A: The owner is using rational expectation reasoning to hire more engineers to quickly be ready now for future demands of a long-term economic shift.

Q: The owner of a national construction company has been watching current economic changes. They have gathered historical data from their company’s business experiences through up and down markets and have decided on a plan to follow as demand changes over the next year, three years and five year plan, with alternative options based on past data. Why is the owner making these type of decisions for the long-run?
- The owner is using rational expectation reasoning to change important aspects of the company to be ready for future demands of a long-term economic shift.
- The owner is using aggregate expectation reasoning to to change important aspects of the company to be ready for short-term future demands.
- The owner is using adaptive expectation reasoning to change important aspects of the company to be ready for future demands as the long-term economy shifts.
A: The owner is using adaptive expectation reasoning to change important aspects of the company to be ready for future demands as the long-term economy shifts.

Q: If a neoclassical model shows increasing wages in the economy in the short run, what else will likely occur?
- A change in government policy to decrease in aggregate demand.
- A rightward shift of the short-run aggregate supply curve.
- An inflationary increase in price level.
A: An inflationary increase in price level.

Q: What else will probably happen if a neoclassical model shows increasing wages in the economy in the short run?
- A change in government policy to decrease in aggregate demand.
- A rightward shift of the short-run aggregate supply curve.
- A leftward shift of the short-run aggregate supply curve.
A: A leftward shift of the short-run aggregate supply curve.

Q: Of the following government policies, which would be considered a neoclassical response to an economic recession?
- an increase in government spending
- adjusting the minimum wage higher
- dissolving labor unions
A: dissolving labor unions

Q: Which of the following government policies is a neoclassical response to an economic recession?
- Increase in government spending.
- Adjust the minimum wage higher.
- Terminating labor unions.
A: Terminating labor unions.

Q: If you were to explain to a friend how the macroeconomy would be influenced by neoclassical policies, which of the following statements would be the correct explanation?
- The macroeconomy has inflexible prices and wages meaning it is not self correcting and in need of governmental intervention for correction.
- The macroeconomy has flexible prices and wages it is self correcting but still needs governmental regulation of wage policies, price ceilings and floors.
- The macroeconomy has flexible prices and wages and it is self correcting and not in need of governmental intervention for correction.
A: The macroeconomy has flexible prices and wages and it is self correcting and not in need of governmental intervention for correction.

Q: Your friend asks what you are studying and you tell them neoclassical policies in a macroeconomy. Which of the following statements would explain neoclassical economic policy the best to your friend?
- Neoclassical policies would call for government intervention during a recession.
- Neoclassical policies would call for limited government intervention during a recession.
- Neoclassical policies would call for no government intervention during a recession.
A: Neoclassical policies would call for no government intervention during a recession.

Q: The country of Botalava hired Gustav to assist with government policies regarding the macroeconomy. Gustav is a neoclassical economist and makes all decisions based on that economic philosophy. What policies will Gustavo tell the government to enact in order to foster a health economy?
- Policies should be set up to regulate wages and unions, and set price floors and ceilings for specific fundamental goods.
- Policies should be set up to increase production output through regulating sales of resources and strictly monitor exports and imports.
- Policies should be set up to keep inflation low and maintain low tax levels over the long run.
A: Policies should be set up to keep inflation low and maintain low tax levels over the long run.

Q: The country of Bratislaka hired Gudurn to assist with government policies regarding the macroeconomy. Gudrun is a neoclassical economist and makes all decisions based on those economic philosophies. What policies will Gudrun tell the government to enact in order to foster a health economy?
- The government should set up and regulate wages and unions, and set price floors and ceilings for specific fundamental goods.
- The government should increase production output through regulating sales of resources and strictly monitor exports and imports.
- The government should keep inflation low and maintain low tax levels over the long run.
A: The government should keep inflation low and maintain low tax levels over the long run.