What Is the Main Difference in the Classical Model as Compared

question 169

Multiple Choice

What is the main difference in the classical model as compared to the short-run macro model?

• A) In the classical model the economy automatically operates at potential GDP while in the short run model the economy can operate at a different level of GDP
• B) In the short run model the economy automatically operates at potential GDP while in the classical model the economy can operate at a different level of GDP
• C) Fiscal policy has no effect in the short run model but is very effective in the classical model
• D) There is no difference in the predictions of the two models
• E) The classical model does a better job in predicting recessions than the short-run macro model

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Definitions:

Interest Rate Swap

A financial contract between two parties to exchange interest rate payments on a specified principal amount, often used to manage risk or alter interest rate exposure.

Floating Rate

An interest rate that fluctuates over time with the market or an index.

Fixed Rate

An interest rate that remains unchanged throughout the entire term of the loan, mortgage, or bond.

Derivative Security

A financial security whose value is dependent upon or derived from one or more underlying assets.