Econ Questions?

Question

Adam Smith's notion of the invisible hand is best summarized by which of the following statements?

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a

When individuals are allowed to pursue their own self-interest in their economic interactions, resources will naturally flow to their highest-valued use

b

Allowing people to choose how to use their own labor allows government to allocate output so that the interest of society is best served

c

Individuals are more likely to intentionally promote the public interest when taxes are low and government remains invisible

d

In a capitalist economy, markets are more efficient when government directs productive activity behind the scenes

Which of the following is NOT an assumption of the classical model?

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a

Flexible prices and wages

b

Say's Law is true

c

Unemployment does not occur

d

Saving equates with investment

Question 6

HomeworkUnanswered

If Say's Law is true, then:

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a

aggregate demand determines equilibrium income and output.

b

supply creates own demand.

c

government must actively manage the economy.

d

the economy cannot self-correct.

In the classical labor market, a surplus of labor:

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a

cannot occur because wages are flexible.

b

is eliminated by falling wages.

c

is likely to persist without government intervention.

d

represents only voluntary unemployment.

All of the following are associated with the classical model EXCEPT:

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a

a general glut, or overproduction, of goods and services is not likely to occur.

b

the economy is self-regulating and naturally moves toward full employment in the long run.

c

markets for specific goods and services will not be plagued by shortages and surpluses.

d

markets are likely to be guided as if by "an invisible hand" to lead to outcomes that are efficient for sellers but inefficient for buyers.

In the classical credit market (market for loanable funds), if the interest rate is above the equilibrium interest rate:

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a

there is a surplus of loanable funds and the interest rate will fall.

b

there is a surplus of loanable funds and the interest rate will rise.

c

there is a shortage of loanable funds and the interest rate will fall.

d

there is a shortage of loanable funds and the interest rate will rise.

The Classical model concludes that government should:

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a

take a laissez-faire approach to macroeconomic policy only when the economy will not correct itself.

b

take a laissez-faire approach to macroeconomic policy because a market economy is self-regulating.

c

take active steps to decrease the price level to close an inflationary gap.

d

take active steps to increase the price level to close a recessionary gap.

Answer 1

Instead of answering each question, here's a broad overview of the Classical Economic perspective, sometimes called "school".

Classical economics formally begins in 1776 when Adam Smith publishes An Inquiry into the Nature and Causes of the Wealth of Nations, usually shortened to The Wealth of Nations. It is a rather long book that makes many observations, but the most famous is the "invisible hand". Smith asserts that economies work best when they are left alone from government interference. His argument is that if producers want to earn profits they should produce products that consumers want to buy. Governments, he argues, distort this free market and lead to outcomes that are not best for society. This is the basis of Classical economics, governments should limit their interference in the economy as much as possible.

Take a macro example with a recession. Recessions occur when spending declines so in the short run this is bad, but a Classical economist will argue the problem is self-correcting if left alone. They say that if consumers and businesses decrease their purchases and prices are allowed to fall (or be flexible), eventually consumers and businesses will be willing to purchase products again, ending the recession. This long-run approach was popular until the rise of Keynesianism in the 1940s and beyond.