Exam 20: A: Appendix: Policy Disputes Using the Self-Correcting Aggregate Demand and Supply Model

-In Panel (a)of Exhibit 20A-1,the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂.Classical theory argues:

-Assume that the economy depicted in Panel (b)of Exhibit 20A-1 is in short-run equilibrium where AD₁ equals SRAS₁.Keynesian theory argues:

Classical theory advocates ____ policy and Keynesian theory advocates ____ policy.

Exhibit 20A-3 Macro AD/AS Model -As shown in Exhibit 20A-3,assume the marginal propensity to consume MPC equals 0.75.Using discretionary fiscal policy,federal government spending should be ____ in order to restore the economy from E₁ to full employment.

-Assume that the economy depicted in Panel (a)of Exhibit 20A-1 is in short-run equilibrium where AD equals SRAS₁.If the economy is left to correct itself according to classical theory:

Assume the economy is operating at a real GDP above full-employment real GDP.Classical economists would prescribe which of the following policies?

Exhibit 20A-2 Macro AD/AS Models -As shown in Panel (a)of Exhibit 20A-2,assume the economy adopts a classical nonintervention policy.Which of the following would cause the economy to self-correct?

Exhibit 20A-2 Macro AD/AS Models -In Panel (a)of Exhibit 20A-2,the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂.If the federal government or Fed decides to intervene,it would most likely:

Assume the economy is in short-run equilibrium at a real GDP above its potential real GDP.According to classical theory,which of the following policies should be followed?

Assume the economy is in short-run equilibrium at a real GDP below its potential real GDP.According to Keynesian theory,which of the following policies should be followed?

Exhibit 20A-2 Macro AD/AS Models -In Panel (a)of Exhibit 20A-2,the economy is initially in short-run equilibrium at real GDP level Y₁ and price level P₂.Classical theory argues that: