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___ 5. According to Say’s Law:<br />

a. supply creates its own demand<br />

b. demand creates its own supply<br />

c. the act of production leads to equivalent income to resource owners<br />

d. Both a. and c. above<br />

___ 6. According to classical economic theory:<br />

a. a market economy will automatically adjust to Natural Real GDP<br />

b. supply creates its own demand<br />

c. flexible interest rates assure that any consumer savings will be exactly offset by<br />

business investment<br />

d. All of the above<br />

___ 7. According to classical economic theory:<br />

a. government intervention is necessary to maintain adequate demand<br />

b. interest rates, wages, and prices are inflexible<br />

c. the proper economic policy is laissez-faire<br />

d. All of the above<br />

___ 8. According to classical economic theory, savings and investment will be equal because:<br />

a. demand creates its own supply<br />

b. interest rates are flexible<br />

c. wages rise in a recessionary gap<br />

d. All of the above<br />

___ 9. According to classical economic theory, if the desire to save increases:<br />

a. the interest rate will fall<br />

b. the savings supply curve will shift right<br />

c. the quantity of savings and investment will be equal<br />

d. All of the above<br />

___ 10. The ideal quantity of total output in the economy:<br />

a. is called Natural Real GDP<br />

b. is the one that will result in zero unemployment<br />

c. can be reached only with government intervention, according to classical theory<br />

d. All of the above<br />

___ 11. If Real GDP is less than Natural Real GDP:<br />

a. the economy is in a recessionary gap<br />

b. the unemployment rate will be lower than the natural unemployment rate<br />

c. the shortage of labor will cause wage rates to rise<br />

d. All of the above<br />

___ 12. If Real GDP is greater than Natural Real GDP:<br />

a. the economy is in an inflationary gap<br />

b. the unemployment rate will be higher than the natural unemployment rate<br />

c. the shortage of labor will cause wage rates to rise<br />

d. Both a. and c. above<br />

___ 13. According to classical economic theory, a market economy will automatically close an<br />

inflationary gap by:<br />

a. the shortage of labor will cause wage rates to rise<br />

b. the increase in wage rates will shift the SRAS curve to the left<br />

c. the SRAS curve will shift to the left until Real GDP equals Natural Real GDP<br />

d. All of the above<br />

FOR REVIEW ONLY - NOT FOR DISTRIBUTION<br />

7 - 11 Classical Economic Theory

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