Compare and contrast the classical and Keynesian schools of thought for the following economic issues. (a) The flexibility of wages and prices. (b) The importance of macroeconomic policies
What will be an ideal response?
(a) The flexibility of wages and prices is a principal point of disagreement between classical economists and Keynesians. Classical economists believe that wages and prices are quite flexible; in response to a change in market conditions, wages and prices adjust quickly to their new market-clearing levels. Keynesians believe that wages and prices are rigid or sticky; in response to changes in the economy, wages and prices adjust slowly to their new market-clearing levels.
(b) Classicals and Keynesians also disagree about the use of macroeconomic policies. Given wage-price flexibility, classical economists believe that the market economy normally provides for full employment. They believe that government intervention in the form of macroeconomic fiscal and monetary policies is not needed to prevent recessions. Given slow adjustments in wages and prices, Keynesians believe that recessions could plague the economy for several years. They believe that efficient use of macroeconomic policies could return the economy to equilibrium more quickly.
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If everyone knew in advance the exact rate of inflation:
A. the economy will have reached its long run equilibrium. B. borrowers would be discouraged when inflation will be low and lenders when inflation will be high. C. the risk of the breakdown of financial intermediation would increase. D. the exact rate of inflation wouldn't matter so much because people could prepare.
Since reserve requirements on time and savings deposits were phased out in the early 1990s,
a. only the M1 money multiplier is affected by increases in time and savings deposits. b. only the M2 money multiplier is affected by increases in time and savings deposits. c. neither the M1 nor the M2 money multipliers are affected by increases in time and savings deposits. d. both the M1 and M2 money multipliers are affected by increases in time and savings deposits.