d.) changing tastes. Classical economists believe that in the short-run, in the real world:? Keynesian economists argue that sticky prices and wages would make it difficult for the economy to adjust to its potential output. wars. Some economists dispute classical neutrality. 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 Please, please, help! 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. Unemployment was caused by a “market that doesn’t clear” due to wage “stickiness.” The solution was a devaluation of the currency to reduce real wages, even if nominal wages were unchanged or rising. 2.) 3. The Keynesian economists argued that wages had become “sticky” due to unions refusing to allow wage rates to fall. Flexible prices and wages will adjust to correct the imbalance and in the long-run bring back full employment. tax increases. The important assumption of the Keynesian model is that prices and wages are sticky. Economists who advocate this approach to macroeconomic policy are said to advocate a … 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, … b. prices and wages weren't flexible enough to bring about equilibrium in … Since the market is self-regulating, there is no need to intervene. a.) e.) all of the answers are correct. This means that if the economy is out of whack the government should leave it alone. Classical economists also believe in self-correction. c.) poor crop growing seasons. 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. )Which of the following did classical economists believe caused depressions and high unemployment? Lesson Summary Keynesian Theory does a better job in explaining the fact that the prices can be sticky and inflexible. b.) a. prices and wages were flexible. 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. QUESTION 8 Read pages 437-442 of the textbook before answering the following question. 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. 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. The classical economists believe that the market is always clear because price would adjust through the interactions of supply and demand. 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. True/false: The unemployment problem becomes more severe if prices are sticky downward. So this is how economists illustrate the Classical model as well as the Keynesian model. 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