In each case, try to determine not just THE ANSWER but also why. Try to use the questions as a way of enhancing your understanding of the Classical model/theory.
I. Which of the following is true of and/or consistent with, Classical economics?
a) Accepted the idea and policy implications of Say's Law
b) Assumed that prices and wages (including interest rates) were free to fall whenever there were surpluses in the market
c) Assumed that decision makers reacted to changes in relative (rather than absolute) prices
d) Argued that if saving (a leakage) exceeded investment (an injection), then the economy would go into a recession or depression
e) Had considerable confidence in the ability of government to "fix" a broken economy through the use of macroeconomic stabilization tools such as monetary and fiscal policies
f) Argued that flexible interest rates would automatically equalize saving and investment so that there would never be persistent overproduction in the economy
II. Which of the following is NOT descriptive of Say's Law?
a) It was meant to be applied to aggregates, and not to individual products in the economy
b) It suggests that in the aggregate, over time, production will call forth sufficient spending to take that production off the market
c) It implies that an economy's economic inner-tube will not shrink/contract because leakages are exceeding injections
d) It implies that an economy will not experience recession/depression due to overproduction in the economy
e) It implies that insufficient aggregate demand (that is, under-spending relative to production) need not be a concern as a threat to economic health
Generally, who were these Classical economists?
What did they see as the main economic function of the government?
Would Classical economists likely have supported the notion of government passage of and enforcement of antitrust laws?
Would a Classical economist worry that citizens in an economy might save too much?
What determines the real rate of interest in the Classical model? Can you illustrate?
If a Classical economist noted that investment in the economy exceeded saving, what would he conclude relative to interest rates? What would he expect in terms of an adjustment process? What would he expect to see in terms of the effect on the size of the economic inner-tube?
If there were temporary, short-term unemployment in the economy, how would a Classical economist expect labor markets to react?
If there were temporary, short-term overproduction in the economy, what would a Classical economist expect in terms of an adjustment process?
If there were long-term, severe, general overproduction in the economy, what would a Classical economist expect to happen in the way of adjustment?