Midterm 3 - Notes on Practice Qs (2)

Question 1

In equilibrium, saving equals ______

Answer 1

investment

Question 2

in equilibrium, saving equals investment why?

Answer 2

Question 3

In the equilibrium of the neoclassical model, in response to an increase in current productivity, aggregate saving increases.

T/F

Why?

Answer 3

Question 4

What is the neoclasical model?

Answer 4

The neoclassical model is a macro model where prices and wages adjust freely, so markets clear and the economy stays at its “natural” or efficient level.
A simple way to think about it:
The neoclassical model = the flexible-price model.
That is why it usually reacts more strongly than sticky-price New Keynesian models.

Big idea
In the neoclassical model:
firms choose labor and capital to maximize profit
households choose consumption, saving, and labor
prices and wages adjust
the real interest rate adjusts
markets clear
So the economy is always at an equilibrium where supply and demand match.
There is not the kind of short-run “stuck” behavior you see in sticky-price models.

Question 5

what does it mean for markets to clear?

Answer 5

at a specific price, the quantity supplied equals the quantity demanded, eliminating any surplus or shortage. It represents an equilibrium point where all buyers find sellers and vice versa, frequently adjusting prices until this balance is achieved. This concept assumes flexible pricing and efficient, competitive markets.
Wikipedia