16
PART TWO: CLASSICAL ECONOMICS AND THE KEYNESIAN
REVOLUTION
CHAPTER 3: CLASSICAL MACROECONOMICS (I): OUTPUT
AND EMPLOYMENT
Additional Questions
Problems and/or Essay Questions:
1. Briefly define an endogenous variable and an exogenous variable. What variables are
endogenous in the classical model? What variables are exogenous.
2. Explain how an increase in technology, which increases the productivity of labor, will
affect the labor market, the production function, and aggregate output. Provide graphs to
illustrate.
3. What are the two key features of perfectly competitive markets in the Classical Model?
4. Explain how an increase in the public’s taste towards less leisure would affect the labor
market, the production function, and aggregate output. Provide graphs to illustrate.
5. Explain why the labor supply curve is positively sloped. Explain why labor demand is
downward sloping.
6. Using a graph of the classical labor market, illustrate the effects of a real wage existing in
the market that is lower than the equilibrium real wage. What will eventually happen in this
labor market if it is perfectly competitive?
7. What two principles of mercantilism did the classicists attack?
8. In the classical model, what is the impact of changes in the demand for goods and services
on aggregate output? Do they affect any real variables?
9. What is Real Business Cycle Theory? What drives business cycles in this model? Where do
10. Is there a positive or negative relationship between real wages and output in the classical
model? Explain.
11. Is it possible to have a production function that exhibits both a diminishing marginal
product of labor and constant returns to scale? Explain.
12. Suppose that the government imposes a tax on firms for money wages they pay. How
would this change the classical aggregate supply curve? Why?
Additional Problems and/or Essay Questions:
13. Consider an economy where the marginal product of labor is characterized by the following
equation:
14. A well known aspect of the classical model is Say’s Law, which states that supply creates
its own demand. In what sense does Say’s law hold in the classical model?
15. Use the graph of the aggregate production function (Figure 3.1) to explain the concept of
the marginal productivity of labor. Draw a graph of the marginal productivity of labor
schedule, with the level of employment on the horizontal axis. Explain the properties of this
schedule.
16. Suppose that you observe a fall in real wages at the same time that output is rising. How
would you explain this within the classical model of aggregate supply?
17. What factors change aggregate supply in the classical system? How do these factors affect
aggregate output? What factors change aggregate demand in the classical system? How do
these factors affect aggregate output?
18. How would you define “technology”. In the production function Y=F(K,N), where is
technology? Explain.
Multiple-Choice Questions:
1. One factor which did not influence the levels of real output and employment in the classical
system was the
2. The classical economists attacked the mercantilist propositions that
3. The supply-determined nature of output and employment is a crucial feature of
4. Which of the following is not consistent with perfect competition?
5. The supply of labor in the classical system is a function of the
6. For a given level of the money wage, an increase in the price level will cause the
7. Which of the following is not consistent with perfect competition?
8. The author of The Wealth of Nations; The author of the General Theory
9. In the classical macroeconomic model, a decrease in the real wage would cause
10. As the real wage increases, assuming that the substitution effect dominates, then
11. Technological change that increases the marginal productivity of labor in the classical
model would cause
12. A proportionate increase in the price level and the money wage in the classical model
13. A production function relates
14. If the demand for labor is plotted against the money wage, with the money wage on the
vertical axis, then
15. The classical economists believed that
16. The marginal product of labor is
17. With respect to Figure 3.1, the classicists argued that
18. If the wealth effect of an increase in the real wage was greater than the substitution effect of
an increase in the real wage
19. In the classical model, a decrease in immigration would
20. In the classical model, and increase in tax on firms that hired labor would
Figure 3.1
21. With respect to the classical labor market analysis, it is not assumed that
22. If a natural disaster destroys some of the capital stock, then the classical model predicts
23. Which of the following factors will not determine output and employment in the classical
model?
24. Which of the following will increase the marginal product of labor in the labor market?
25. In the classical model,
26. If there is an increase in the price level in the classical model,
27. The aggregate demand curve for labor is the
28. Diminishing marginal returns refers to the fact that
29. The classical model is a model in which
30. A profit-maximizing firm hires labor until
31. Which of the following are endogenous variables within the classical model?
32. In the classical model, the factors determining output and employment are the factors that
33. Assuming a 10-percent decrease in both the nominal (money) wage and the price level in
the classical model, then the quantity of labor supplied will
34. According to Figure 3.2, the marginal product of labor
35. According to the classical model, workers chose a level of labor that equates the
36. If real wages fall as output rises, then in the classical model it must be the case that
37. The vertical classical aggregate supply curve reflects that
38. Assuming a 5-percent decrease in both the nominal (money) wage and 5-percent increase in
39. An increase in immigration would
40. An increase in taxes on labor earnings, everything else equal
41. Which of the following is consistent with diminishing marginal returns?
42. Which of the following is not an exogenous factor of production in the aggregate
production function?
43. The increased willingness of women to enter the workforce has most likely lead to what
outcome in the labor market?
44. To classical economists, it is always true that
45. In the classical model, the supply-determined nature of output is illustrated by a(n)
46. Which of the following statements is (are) correct?
47. According to the classical model, in the labor market
48. With respect to an auction market,
49. A vertical aggregate supply schedule implies that
50. In the classical model, a tax on capital will
51. Assuming a worker’s money wage rose from $10 per hour to $20 per hour while all product
price have doubled, then in the classical model, this worker would
52. Classical economists
53. Which of the following statements is correct? Classical economists
54. In the short-run production function, the following variables must be endogenous:
55. In a perfectly competitive market, firms take:
56. Aggregate income equals:
57. What must be true in a perfectly competitive equilibrium?
58. Which statement best defines the classical perspective?