1. The economic theory based on an analysis of individual maximizing choices is
ID: 1115414 • Letter: 1
Question
1. The economic theory based on an analysis of individual maximizing choices is called
a. monetarism
b. new classical economics
c. business cycle theory
d. Keynesian economics
2. New classical economics
a. differs from classical economics in that the latter focuses on producers’ expectations only while the latter also includes consumers’ expectations in the determination of long-run macroeconomic equilibrium
b. differs from classical economics in that the latter focuses on the determination of long-run aggregate supply while the former focus on the determination of short-run aggregate supply.
c. is similar to classical economics in that both theories incorporate expectations in their analysis of the economy in the long-run.
d. is similar to classical economics in that both theories focus on the determination of long-run aggregate supply and the economy’s ability to reach this level of output quickly.
3. Economists who subscribe to the rational expectations hypothesis
a. argue that discretionary monetary and fiscal policy can control fluctuations in economic activity adequately.
b. believe that governments can influence macroeconomic outcomes better than the private sector.
c. say that people are constantly revising their expectations about future prices based on what transpired in the past and therefore over time, fluctuations in economic activity will cease to occur.
d. base their belief on the economic assumption that people behave in ways that maximize their utility.
4. In 1965 during the Johnson administration, the U.S. economy was headed toward an inflationary gap. Which of the following policies would an economist recommend?
a. A tax cut
b. An open market purchase
c. Increase defense spending
d. A tax increase
Explanation / Answer
1) b). The new classical theory is the answer.
This is because this theory is based on the assumption that agents are assumed to maximise their utility and thus the market always clears in this type of model.
2). a). differs from classical economics in that the former focuses on producers’ expectations only while the latter also includes consumers’ expectations in the determination of long-run macroeconomic equilibrium
This is because Classical Economists assume that whatever is produced will be sold as it is valued by the producer(at cost), while Neo-Classical Economists believed that Consumer's preferences play a major role in the market.
3). d). base their belief on the economic assumption that people behave in ways that maximize their utility.
This is the most apt answer among the 4 choices. This is because Rational Expectation Hypothesis is always of the view that the individual will always act as Rational and would want to maximise his utility. Their is no set pattern that he usually follows to fulfill his preferences. Their is always an indeterminant variable (e) in rational choices that is made.
4). d). A tax increase
An increase in tax will increase the average price levels and thus the average demand for goods will inturn fall thereby controlling inflation.
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