If the Economy Diverges from Its Full-Employment Output, New Classical

question 37

Multiple Choice

If the economy diverges from its full-employment output, new classical economics would suggest that

• A) a change in the velocity of money would be all that is needed to return it to its full- employment output.
• B) an improvement in insider-outsider relationships is all that is needed to return it to its full- employment output.
• C) an efficiency wage in the economy would return it to its full-employment output.
• D) internal mechanisms within the economy would automatically return it to its full- employment output.

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Definitions:

Common Currency

A currency that is used by multiple countries, facilitating trade and financial transactions between them.

Exchange-rate Risk

The risk that changes in the relative value of currencies will negatively affect the value of investments.

Trade Deficits

A situation where a country's imports of goods and services exceed its exports.

Present Consumption

The act of using goods and services for immediate needs or desires, rather than saving or investing for future use.