Chapter 11: 18 (page 291)
Do neoclassical economists believe in Keynes’ law or Say’s law?
Short Answer
Neo-classical economists believed in Say's law.
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Chapter 11: 18 (page 291)
Do neoclassical economists believe in Keynes’ law or Say’s law?
Neo-classical economists believed in Say's law.
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The imaginary country of Harris Island has the aggregate supply and aggregate demand curves as Table 11.3 shows.
| Price Level | AD | AS |
| 100 | 700 | 200 |
| 120 | 600 | 325 |
| 140 | 500 | 500 |
| 160 | 400 | 570 |
| 180 | 300 | 620 |
a. Plot the AD/AS diagram. Identify the equilibrium. b. Would you expect unemployment in this economy to be relatively high or low?
c. Would you expect concern about inflation in this economy to be relatively high or low?
d. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium.
e. How will the shift in AD affect the original output, price level, and employment?
How is long-term growth illustrated in an AD/AS model?
Suppose concerns about the size of the federal budget deficit lead the U.S. Congress to cut all funding for research and development for ten years. Assuming this has an impact on technology growth, what does the AD/AS model predict would be the likely effect on equilibrium GDP and the price level?
Review the problem in the Work It Out titled "Interpreting the AD/AS Model." Like the information provided in that feature, Table 11.2 shows information on aggregate supply, aggregate demand, and the price level for the imaginary country of Xurbia.
| Price Level | AD | AS |
| 110 | 700 | 600 |
| 120 | 690 | 640 |
| 130 | 680 | 680 |
| 140 | 670 | 720 |
| 150 | 660 | 740 |
| 160 | 650 | 760 |
| 170 | 640 | 770 |
a. Plot the AD/AS diagram from the data. Identify the equilibrium.
b. Imagine that, as a result of a government tax cut, aggregate demand becomes higher by 50 at every price level. Identify the new equilibrium.
c. How will the new equilibrium alter output? How will it alter the price level? What do you think will happen to employment?
Why would an economist choose either the neoclassical perspective or the Keynesian perspective, but not both?
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