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Classical economists assumed that wage rates, prices, and interest rates are flexible and will adjust quickly. Consider an extreme case: Suppose classical economists believed that wage rates, prices, and interest rates would adjust instantaneously. What would the classical aggregate supply ( AS ) curve look like? Explain your answer.

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Macroeconomics

13th Edition
Roger A. Arnold
Publisher: Cengage Learning
ISBN: 9781337617390

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BuyFindarrow_forward

Macroeconomics

13th Edition
Roger A. Arnold
Publisher: Cengage Learning
ISBN: 9781337617390
Chapter 10, Problem 2QP
Textbook Problem
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Classical economists assumed that wage rates, prices, and interest rates are flexible and will adjust quickly. Consider an extreme case: Suppose classical economists believed that wage rates, prices, and interest rates would adjust instantaneously. What would the classical aggregate supply (AS) curve look like? Explain your answer.

To determine

The instantaneous adjustment of prices and wages and the classical AS curve.

Explanation of Solution

According to the classical economists, the economy is always self-regulating and does not need any intervention of the government to control its activities other than providing military support. Thus, they demand Laissez-Faire economy where the economic transactions of the economy are free from the government regulations, tariffs, and interventions.

When this assumption turns out to be true and the interest rate of the economy adjusts instantaneously, the aggregate supply curve of the economy will most probably would be a vertical straight line...

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Chapter 10 Solutions

Macroeconomics
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Ch. 10.4 - What happens in the economy if total expenditures...Ch. 10 - How is Keyness position different from the...Ch. 10 - Classical economists assumed that wage rates,...Ch. 10 - Give two reasons explaining why wage rates may not...Ch. 10 - How was Keyness position different from the...Ch. 10 - According to some economists, why might business...Ch. 10 - Given the Keynesian consumption function, how...Ch. 10 - Look at the Keynesian consumption function: C = C0...Ch. 10 - Using the Keynesian consumption function, prove...Ch. 10 - Explain the multiplier process.Ch. 10 - What is the relationship between the MPC and the...Ch. 10 - Explain how a rise in autonomous spending can...Ch. 10 - In which factors will a change lead to a change in...Ch. 10 - According to Keynes, can an increase in saving...Ch. 10 - What factors will shift the AD curve in the simple...Ch. 10 - According to Keynes, an increase in saving and a...Ch. 10 - Can a person believe that wages are inflexible...Ch. 10 - According to Keynes, can the private sector always...Ch. 10 - What does the aggregate supply curve look like in...Ch. 10 - In the simple Keynesian model, increases in AD...Ch. 10 - Suppose consumption rises while investment and...Ch. 10 - Explain how to derive a total expenditures (TE)...Ch. 10 - What role do inventories play in the equilibrating...Ch. 10 - Identify the three states of the economy in terms...Ch. 10 - If Real GDP is 10.4 trillion in Exhibit 13, what...Ch. 10 - How will a rise in government purchases change the...Ch. 10 - Compute the multiplier in each of the following...Ch. 10 - Write an investment function (equation) that...Ch. 10 - Economist Smith believes that changes in aggregate...Ch. 10 - Use the accompanying figure to explain the...Ch. 10 - The TE curve in Exhibit 12 (d) is upward sloping...Ch. 10 - In Exhibit 12(d), what does the vertical distance...Ch. 10 - In the accompanying figure, explain what happens...Ch. 10 - In the accompanying figure, if Natural Real GDP is...

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