True/false: The unemployment problem becomes more severe if prices are sticky downward. This stickiness, they suggest, means that changes in the money supply have an impact on the real economy, Classical economists believe that C prices are sticky Cthe economy can adjust back to full employment on its own C the short run is more significant than the long run C aggregate demand is more significant than aggregate supply C the economy needs help in moving back to full employment tax increases. e.) all of the answers are correct. b.) On the contrary, Keynesian economists believe because of price and wage rigidities the economy’s equilibrium output in the long run may be less than its potential output. Keynesian Theory does a better job in explaining the fact that the prices can be sticky and inflexible. Keynesian economists argue that sticky prices and wages would make it difficult for the economy to adjust to its potential output. The important assumption of the Keynesian model is that prices and wages are sticky. Classical economists believe that in the short-run, in the real world:? Classical economists also believe in self-correction. b. prices and wages weren't flexible enough to bring about equilibrium in … Because Keynesian economists believe that recessionary and inflationary gaps can persist for long periods, they urge the use of fiscal and monetary policy to shift the aggregate demand curve and to close these gaps. wars. QUESTION 8 Read pages 437-442 of the textbook before answering the following question. Flexible prices and wages will adjust to correct the imbalance and in the long-run bring back full employment. Classical economists belief that prices and quantities adjust to the changes in the forces of supply and demand and that the economy produces its potential output in the long run. They argue that nominal prices are sticky, at least in the short run, and that this EXECUTIVE SUMMARY Many economists believe that prices are “sticky”—they adjust slowly. The Keynesian economists argued that wages had become “sticky” due to unions refusing to allow wage rates to fall. can only be reached through government involvement, Keynesian economists believe that the prices of goods and services determine the GDP, which governs the investment and the level of employment. )Which of the following did classical economists believe caused depressions and high unemployment? Economists who advocate this approach to macroeconomic policy are said to advocate a … d.) changing tastes. The classical economists believe that the market is always clear because price would adjust through the interactions of supply and demand. Classical economists belief that prices and quantities adjust to the changes in the forces of supply and demand and that the economy produces its potential output in the long run. 3. So this is how economists illustrate the Classical model as well as the Keynesian model. Lesson Summary 2.) Please, please, help! Since the market is self-regulating, there is no need to intervene. Resources: John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Inc., 1964); John Maynard Keynes, A Tract on Monetary Reform (London: MacMillan, 1923); Consumer Price Index, All Urban Consumers (CPI-U), Economagic; Michael Bruno and William Easterly, “Inflation Crises and Long-Run Growth,” Policy Research Working Paper, The World Bank, … c.) poor crop growing seasons. a.) a. prices and wages were flexible. This means that if the economy is out of whack the government should leave it alone. Some economists dispute classical neutrality. 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