Macro 202: Review Quiz 2
The (Neo)Classical Model
Answer each question using the classical model.
(1) What determines the level of employment (N)? Draw and label graph #1. What is this graph called?
(2) What determines the level of output? Draw and label graph #2. What is this graph called? [hint: Y = f (K*, … )]
(3) What determines the rate of interest? Draw and label graph #3. What is this graph called?
(4) a. What must be true if involuntary unemployment exists? b. Show this on the graph of the labor market (below).
c. What will adjust to automatically bring the economy back to full employment?
(5) a. Why does money pose a problem for the maintenance of Say’s Law?
b. If consumption decreases, what occurs in the model to ensure that Say’s Law holds?
c. Show this on the graph.
(6) a. What is true about the relation between saving (S) and investment (I)? b. What variable adjusts to maintain this relationship between saving and investment?
(7) What happens to the price level if the government increases the money supply by 100%?
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