In the Classical Model, an increase in aggregate demand will result in
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an increase in the price level and no change in output.
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Which of the following is a possible explanation for sticky prices?
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Labor contracts cause wages to be fixed over the contract period.
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The Keynesian model argues that prices are sticky. One reason supporting this argument is that
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nominal wages are inflexible downwards.
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Since the nominal wage is deemed inflexible, a decrease in aggregate demand causes firms to
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reduce their workforce.
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Thus, according to the Keynesian model full employment is
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possible but not guaranteed
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An important difference between the Classical Model and the Keynesian Model is that the
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Keynesians believe that the aggregate supply curve is horizontal in the short run. The Classical model assumes prices are flexible so that the aggregate supply curve is vertical and the economy is always at full employment.
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What did Keynes mean when he said that prices are sticky?
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Prices, especially the price of labor, are inflexible downward.
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If the prices were sticky, according to Keynes, this would then imply that the
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short-run aggregate supply is horizontal.
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The Modern Keynesian short-run aggregate supply curve is best described by which of the following statements?
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It is very flat at low levels of real GDP; increases slightly as real GDP grows; and becomes very steep as real GDP surpasses full employment.
Your answer is correct.
B.
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In modern Keynesian analysis, a decrease in aggregate demand will result in
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a decrease in both the price level and output.
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The long-run aggregate supply curve will not shift if there is a change in
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the price level.
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All of the following will shift the short-run aggregate supply and the long-run aggregate supply except for
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a temporary change in input prices.
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The short-run effect of this change on the economy is
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a leftward shift of the SRAS curve, and cost-push inflation.
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