Which is a feature of the Classical theory? a. Prices and wages cannot drop. b.

Question

Which is a feature of the Classical theory?
a. Prices and wages cannot drop.
b. The economy might be at equilibrium with substantial unemployment.
c. Government intervention is necessary to correct recessions.
d. The economy automatically returns to full employment if the government doesnt intervene.


Which of the following events is likely to cause both a increase in real GDP and an increase in
the price level? (Hint: Sketch a graph of the Aggregate Supply - Aggregate Demand model.)

a. A decision by the Fed to raise interest rates causes businesses to cut back on their investment spending.
b. The value of the dollar in terms of other countries currencies goes up, causing a fall in exports.
c. A government tax (while at full employment) cut encourages people to increase spending on homes, cars, and recreation.
d. A war with Iran causes the price of crude oil, an important input for the production of most goods, to double.

Explanation / Answer

b. The economy might be at equilibrium with substantial unemployment.

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