Question

[1] Assumptions:
A) are a key component of a model.
B) are conditions held to be true in a model.
C) influence the conclusions derived from the model.
D) all of these answers are correct.

[2] The primary conclusion of the classical school is:
A) businesses do not change prices once they are set.
B) a free market economy will automatically operate at full employment.
C) a free market economy can operate at less than full employment for long periods of time.
D) there is no relationship between the amount saved and the amount invested in an economy.

[3] Classical economists advocate the view that a free market economy:
A) should be replaced by a command economy.
B) will automatically tend to operate at full employment.
C) is best stabilized by using fiscal and monetary policy tools.
D) is best stabilized by extensive use of all government tools, including regulation.

[4] The classical school assumes that:
A) supply creates its own demand, wage and prices are flexible, and savings equal investment.
B) supply creates its own demand, wage and prices are inflexible, and savings equal investment.
C) supply does not create its own demand, wage and prices are flexible, and savings do not necessarily equal investment.
D) supply does not create its own demand, wage and prices are inflexible, and savings do not necessarily equal investment.

[5] The primary conclusion of Keynesian economics is that:
A) there is no tradeoff between unemployment and inflation.
B) businesses will change their prices to achieve macroeconomic goals.
C) a free market economy will automatically operate at full employment.
D) a free market economy can operate at less than full employment for long periods of time.

[6] In the Keynesian model, when total spending in the economy is less than total production, business inventories:
A) increase.
B) decrease.
C) remain unchanged.
D) decrease at first and then remain unchanged.

[7] In the Keynesian model, if total spending by households, businesses, government units and foreign buyers is greater than the total output produced in the economy, then:
A) total output will increase.
B) total spending will decrease.
C) total output will increase and total spending will decrease.
D) any of these answers could happen.

Answer 1

1) Option D. Assumptions are actually formulated to make the economic model easy to understand and analyse. These shape the model because each assumption when relaxed, change the entire model and its meaning.

2) Option B. Classical school of thought emphasized on the role of market in keeping the economy at its full employment level without the intervention of the government

3) Option B. This is because market operates with the use of demand and supply forces that are strong enough to bring the equilibrium every time it is lost

4) Option A. This is what say’s law suggests and because supply is able to draw the demand, there is no recession or expansion

5) Option D

6) Option A

7) Option A