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Ethical Culture, GM Case Study

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INTRODUCTION

About 800, 000 of general motor's cars had engine shut down due to failure of the ignition switches. It often occurred when the vehicles were in motion hence most accidents were caused resulting into several deaths. For years, general motors never discovered that the problem was with their ignition switches. A lot of funds were compensated for the deaths caused. Despite GM discovering the cause for the accidents caused were due to faulty ignition switches, the information was disclosed for about fifteen years. Research reveals that the cause for the information disclosure was dur to ethical lapse in the corporate company. It took more than a decade for the government to discover that more than 2.6 million cars got damaged and caused accident due to faulty ignition switches. There was liaise with the federal prosecutors to announce a fine of 900 million US dollars to end the criminal investigations. Besides, they were to adhere to some terms and conditions for the coming three years. There are main events that occurred during the recall

Key instances of the recall

 In February 2002, Engineer Ray DeGiorgio who specialized in ignition switches designed an ignition switch. According to the quality assurance team the standards of the gadget did not meet GM's specifications. However, the switch was later used in Saturn Ion and later in Chevrolet Cobalt despite it being identified that it was below the standards. The switch was then used in Saturn Sky, Chevrolet HHR, PontiacG5 and Solstice. In 20005 a Chevrolet Cobalt owner, Amber Rose, got involved in an accident and died. Investigations showed that the frontal crash resulted from faulty switches which changed positions from the run to accessory hence resulting into cut off power to the airbags, steering and brakes. It led to a fatal accident. To resolve the situation, Engineer Ray signed a redesign of the ignition switch but in his redesign the part number is not changed. It led to uncertainties as to whether the changes were made or not. The alleged redesigned switch was used in cars from 2007. In 2013 the National Highway Traffic Safety Administration (NHTSA) declined to open investigations as to why Cobalt and Ion did not have proper air bags regarding several accidents that occurred during that period. NHTSA claimed that GM concealed important information hence preventing them from going further with the investigations.

A new CEO, Mary Barra, discovered in 2013 that there was an issue with the ignition switches in GM. Around February 2013, GM recalled 1.6 million cars to repair spoiled ignition switches, the number later grew to 2.6 million cars. General Motors received a fine of $35 million by US government for failing to reveal the cause of the problem early enough. GM paid then fine and admitted to give a report on the government's demands and its safety operations in good time. In June 2014, Barra released a report which were investigations conducted by prosecutor Anton. Barra stated that regarding the investigations, 15 employees were retrenched and five have undergone penalties due to their actions. The CEO agreed to compensate fund to victims who reported companies as from the first day of August. It was discovered that defective switches resulted into 275 injuries and 124 deaths and each victim's family will be compensated at least 1 million dollars. The company had 625 million dollars for the compensation process. 

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General Motor's actions towards the issue

General Motor's issue on defective ignition switches not only costed the company a lot of money but also tarnished its name to the public. Since the issues were related to ethics and culture, the company decided to review and publish its ethical codes. All employees were required to read, sign and follow the ethical codes of conduct failure to which punishments will be applied. By GM resorting to admit they had faulty switches, they chose on the engineering code of ethics other than profitability. Regarding GM's failure in culture and leadership, the code of ethics had to cover the entire stakeholders involed in the company's operations from the junior most to senior most positions. Their code of ethics addressed issues on integrity and the company's terms and values.

Among the code's listed was the significance of speaking up in case there are corruption or misconduct issues. The company majors on safety, identification and resolving the problems encountered. Among the issues listed are accountability, conflict resolution, management of resources and reporting of misbehavior such as theft, violence and fraud. The speak up policy was meant to encourage the employees to report any misconduct they observe without fear of being harmed or retrenched. The company also resorted to improving vehicle safety. The employees had to understand the codes of ethics including the repercussions of committing crimes. They resorted that their first priority as a company will be safety.

Recommendations of possible solutions to GM's problem

Studies show that ethics is controlled by culture. A large number of employees at GM decided to remain silent about the ignition switches which resulted to several deaths, this clearly shows that a company can have well laid out codes of ethics but no satisfiable integrity. It is not only enough to pass good laws regarding some policies in the company, but also important for employees to use their common sense and have a sense of humanity in them. Employees need to have good morals and the desire to do the right thing and be accountable. The leaders should be ready for any crisis and also be able to lead under the company under turbulence for the sake of positive transformation of the employees. 

Read Also: The complexity of maturation on the example of Katherine Anne Porter's The Grave 

Corruption is secretive, culture change is gradual. Problem acceptance is an important way of solving ethical issues in an organization. Deploying other stakeholders to investigate the company's problems also helps identify the issues. Valukas' report regarding the switch issues in GM shows a problem of silence and concealment. After it was discovered that the switches designed by engineer ray has a lower torque spec. the engineer was under pressure to deliver a less costly ignition switch and culture encouraged this behavior. In conducting investigations, witnesses from top most executive positions also need to be spotted.

            General Motors learned a lot of lessons from the ordeal, they realized that a lot of effort and resources should be geared towards ensuring that the environment is ethically heathy and that employees have the right morals. Leaders living on assumptions that their employees will always do the right thing can result into discovery of misconducts later after a damage is made. Organizational leaders need to know their organizational culture, this can only be identified through proper communication. When communication is functional from the junior employees and up through the senior, discovering a problem would be easier. There could be information that a lot of employees are aware of but the CEO has no idea about them. Such matters can only be addressed through constant communication through meetings and emails.

Employees also need to communicate any misconduct happening in the organization. A culture of integrity and honesty need to be nurtured in organizations. The only way this can be done is when the leaders do thorough inspection in the company and interact with employees at personal level. By creating a conducive environment and being approachable, knowing what is happening in the business will be made easier. After a mistake is identified, leaders should learn and adapt to the current situations of the organization. They ought to quickly notice possibilities and solutions to the crisis. They need to only expect trustworthiness if it is more inclined to viewing the positive side of the crisis.

Conclusion

It took about fifteen years for managers to release bad news about the faulty ignition switches in general motors. For the news to be out, the managers had to go back to history and understand how it all began. Emphasis of employees doing the right thing and being honest helps eliminate the chances of nurturing bad culture into the business environment. Organizations should concentrate more on their consumers safety other than profitability. They need not to wait until several cases are reported on the consequences of their actions for them to release their reports. Managers should be well prepared for tragedy and crisis and be able to survive through such atmosphere.

Project management career

Project management is considered to be a comprehensive program that has an objective of improving leaders' performance in the industry and also the organization's performance. The program has offered a hand in raising productivity to both the corporate as well as the scientific world. Any leader requires the right persons in his or her management to realize the set goals as well as the objectives of the organization as a whole. Different people have the capability of occupying different managerial positions that are available, in trying to realize the goals and the purposes that are set by a particular firm concerning the skills that they have as well as their reliability. The roles are inclusive of the project manager, team members, sponsor, team leader, as well as the steering committee (Cunningham, 2015). The team members perform almost all the work in the company, they are the ones in the ground, and they are as well the engine of the firm. The team members should have the technical skill and people who can perform many duties of different kinds. They should show their responsibilities as a team and in meeting the goal of an organization they should collaborate. One can get outstanding team members who can deliver objectives.

Three potential project management positions that I would personally consider likely employment when I complete the program management program include;

Project manager to chief operating officer

A project manager who has close to 10 years of experience implementing industry projects like in insurance or banking hall, in an institution is very suited to be a chief operating officer. The project manager in his or her work, would have performed with the C-level, corporate departments, as well as all staff level in an organization (Day, 2018). The project manager can see the operational outs and ins as compared to anyone else in any specific department. If one aspires to be a chief operating officer, it will good to get a business degree or MBA more so if one has a base of a technical area degree such as accounting or engineering.

Project Manager to Entrepreneur

A lot of my friends who are project managers and have close to 10 years of experience as project managers while hitting 40s, always tend to start their own business and leave the job. I do believe it is natural for ten years or so within the corporate world as a project manager is a long time. This is because most of the project managers work triply or double hard in trying to meet the set deadlines and the goals of an organization. There is a wide opening in entrepreneurship. I have witnessed many project managers put their project managerial skills into good use by becoming restaurant owners (Novikov, 2017). Some start consultancy firms by themselves, giving out system execution projects. Some even start writing software and selling by use of the industry knowledge as well as secondary solutions.

Business-As-Usual Role to Project Manager

Taking an example of one of my friends who were from the operational department in the global bank. What he was doing over three years was confirmation of trade daily wit counterparties for a trade laced with a relationship manager by any client. This is an operational kind of job, meaning that his responsibilities and roles were not changing much day-to-day. Among his contributions to the organization as being a tester in system enhancement rollout. He was running the test scripts and delivered feedback on the software quality as well as system bugs' documentation (Tang, 2019). The limited period my friend worked got him interested in broader project jobs, and he moved on to join a global management consultancy organization as a business analyst. After four years he made the transition to project manager from business analyst a role that he played for 3years. My friend today is running projects successfully for another global bank. What am trying to put across is that if one is interested in becoming a project manager, from a business analyst after starting as a BAU person, he or she can indulge in project job in a small role. After that, leveraging on the experience of the project, and the knowhow on the industry from the BAU role, there exists a strong proposition in joining a project team or company as a business analyst. It is smoother to transition from a business analyst to be a project manager.

The financial service sectors are where many of the project management jobs fall mostly- particularly in the banks. Private Banks, in particular, are dignified in tapping on all the individuals who are rich in cash.

Project Management Certification

After the completion of the project management program, I would wish to make a point in the certification of project management. One could ask if the project management professional (PMP) certification is a credential that should be considered useful for one to have. In my view, I would state that from the project delivery point of view, I would not find it essential or much useful. I know many managers of projects who are performing so well, but they do not have the project management professional certification (Day, 2018). Having that in mind, the project management professional certification is considered a prerequisite in many jobs of project management, mainly in the project management parts in banks. It is like the MBA or the CFA designation where it does not hurt having one, but it doesn't matter in acquiring a project management role.

Ch26 Neoclassical Perspective

Ch26 Neoclassical Perspective

Multiple Choice Questions

1. ________________ economists place an emphasis on __________ run economic performance.

A. Phillips; short

B. Keynesian; long

C. Neoclassical; long

D. Says; short

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

2. The neoclassical perspective on macroeconomics emphasizes that in the long run, the economy seems to rebound back to its _____________ and its ____________________.

A. long term growth; cyclical unemployment

B. potential GDP; natural rate of unemployment

C. natural level of output; cyclical unemployment rate

D. real GDP; natural rate of unemployment

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

3. Which of the following is a building block of neoclassical economics?

A. the size of the economy is determined by real GDP

B. sticky wages and prices

C. aggregate demand model

D. wages and prices will adjust in a flexible manner

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

4. Which of the following government policies would be supported by neoclassical macroeconomic assumptions?

A. focus on long-term growth and on controlling inflation 

B. focus on short-term recession and controlling inflation

C. focus on combating depression and cyclical unemployment

D. focus on real GDP and cyclical unemployment

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

5. Which of the following represents a Keynesian point of view of macroeconomics?

A. focus on long-term growth in the economy

B. aggregate supply is the primary determinate of economic output

C. creating increases in aggregate demand to reduce unemployment

D. vertical aggregate supply

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

6. From a neoclassical viewpoint, government should focus less on:

A. long-term growth.

B. controlling inflation.

C. aggregate supply.

D. cyclical unemployment.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

7. The neoclassical view holds that long-term expansion of potential GDP due to _______________________ will determine ____________________.

A. economic growth; the size of the economy

B. government spending; aggregate demand

C. government spending; aggregate supply

D. economic adjustments; cyclical unemployment

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

8. The Keynesian view of economics assumes that:

A. the Keynesian Phillips curve is vertical.

B. wages are sticky.

C. the economy must focus is on long-term growth.

D. economic output is primarily determined by aggregate supply.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

9. In the neoclassical version of the AD/AS model, which of the following should you use to represent the AS curve?

A. the AS curve shifting as productivity increases

B. an upward sloping curve with a vertical top

C. a vertical line drawn at the level of potential GDP

D. the AS curve shifting as potential GDP expands

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

10. Which of the following is a distinguishing characteristic of the neoclassical view?

A. increasing price levels will increase the unemployment rate

B. wages and real GDP are sticky over time

C. wages are maintained at original equilibrium

D. flexibility of wages and prices over time

Answer: D  Reference:

Explanation:

Type: Multiple Choice                    

11. A vertical AS curve means that the level of aggregate supply (or potential GDP) will determine the real GDP of the economy, regardless of the level of:

A. cyclical unemployment.

B. real unemployment.

C. aggregate demand.

D. inflationary pressures.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

12. In the neoclassic model, economic growth over time shifts potential GDP and the ______________ gradually to the right.

A. vertical AS curve

B. vertical AD curve

C. vertical Phillips curve

D. 45 degree AD curve

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

13. In the neoclassical model, the AS curve shifts to the right over time as_______________________ and potential GDP expands.

A. the macroeconomy adjusts back to real GDP

B. productivity increases

C. the level of real output drops

D. aggregate demand increases

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

14. Over the long run, a surge in aggregate demand from a neoclassical perspective will most likely result in:

A. a rise in level of output.

B. an increase in price level.

C. downward pressure on the price level.

D. pressure for a lower level of inflation.

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

15. If a neoclassical model shows increasing wages in the economy over the long run, what else will likely occur?

A. change in government policy to decrease in aggregate demand

B. substantial short-term off-setting decrease in output

C. inflationary increase in price level

D. short-run decrease in cyclical unemployment

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

16. If an economy experiences a decrease in aggregate demand due to a decline in consumer confidence and output falls below potential GDP, which of the following is likely to occur?

A. more consumption and less saving

B. adjustment back to potential GDP

C. increase in price inflation

D. a rise in unemployment

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

17. Suppose that a rise in business confidence has led to more investment in the economy and higher levels of output. In the short-run Keynesian analysis, the rise in aggregate demand will:

A. lower unemployment.

B. cause government to lower taxes.

C. cause government to increase spending.

D. exports will drop.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

18. From a neoclassical view, which of the following is a true statement?

A. Lower wages will cause an economy-wide increase in the price of a key input.

B. Because wages are flexible, they are unaffected by high rates of unemployment.

C. A surge in aggregate demand ends up as a rise in output, but does not increase price levels.

D. The economy cannot sustain production above its potential GDP in the long run.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

19. Which of the following is a valid criticism of the rational expectations theory?

A. prices do not wait on events

B. the assumption seems too strong

C.  people form the most accurate possible expectations

D. adjustment of wages and prices might be quite rapid

Answer: B  Reference:

Explanation:

Type: Multiple Choice                    Category: Evaluate

20. In the neoclassical view, changes in ____________________ can only have a short-run impact on output and on unemployment.

A. wage levels

B. aggregate supply

C. aggregate demand

D. tax levels

Answer: C  Reference:

Explanation:

Type: Multiple Choice                    

21. In the long-run neoclassical view, when wages and prices are flexible, ________________________ determine the size of real GDP.

A. potential GDP and aggregate supply

B. potential GDP and aggregate demand

C. levels of output and aggregate supply

D. levels of wages and aggregate demand

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

22. The theory of _____________________ holds that people will use all information available to them to form the most accurate possible expectations about the future.

A. adaptive expectations

B. rational expectations

C. Keynesian economics

D. Neoclassical economics

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

23. At a macroeconomic level, the theory of rational expectations points out that if the ______________________ is vertical over time, then people should rationally expect this pattern.

A. GDP

B. Phillips curve

C. aggregate demand curve

D. aggregate supply curve

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

24. When a shift in ________________ occurs, rational expectations hold that its impact on output and employment will only be temporary.

A. aggregate demand

B. aggregate supply

C. wage levels

D. price levels

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

25. In the neoclassical view, the economy has a ___________________________ to move back to potential GDP.

A. rational tendency

B. tendency to be unable

C. self-correcting tendency

D. immediate tendency

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

26. After reports of the subprime mortgage crisis began to appear in the media, which of the following most likely caused housing prices to fall?

A. neoclassical theory

B. cyclical expectations

C. rational expectations

D. Keynesian theory

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

27. If the neoclassical argument that the economy always moves back to potential GDP is accepted, then which of the following will be more important?

A. encouraging higher wages

B. fighting unemployment

C. fighting recession

D. encouraging long-term growth

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

28. From a neoclassical view, which of the following is less important?

A. fighting unemployment

B. encouraging long-term growth

C. fighting inflation

D. level of potential GDP

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

29. The shape of the ______________ involves a tradeoff between unemployment and inflation.

A. aggregate demand curve

B. aggregate supply curve

C. Phillips curve

D. Keynesian demand curve

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

30. Suppose that productivity growth in an economy over a two-year period has fallen to less than 2% per year, causing a severe recession. From the neoclassical view, which of the following will be more important in these circumstances?

A. an increase in the annual unemployment rate

B. supply and demand in the labor market

C. the problem of cyclical unemployment

D. the growth rate of long-term productivity

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

31. Using a neoclassical model, what will the level of cyclical unemployment be when an economy is producing at potential GDP?

A. zero

B. never 0%

C. 1% - 3%

D. 3% - 5%

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

32. From a neoclassical perspective, which of the following would most likely be viewed as an element that underpins long-run productivity growth in the economy?

A. flexible price levels

B. flexible market forces

C. investments in human capital

D. higher unemployment

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

33. The ___________________ argument tends to view inflation as a cost that offers no offsetting gains in terms of lower unemployment?

A. market forces

B. Keynesian

C. neoclassical

D. flexible wage and price

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

34. Which of the following is most strongly supported by the Keynesian perspective of macroeconomics?

A. inflation is a price that might have to be paid to achieve lower unemployment

B. inflation offers no offsetting gains in terms of higher unemployment

C. more emphasis on economic growth and how labor markets work

D. shifts in unemployment primary determine changes in the price level

Answer: A  Reference:

Explanation:

Type: Multiple Choice                    Category: Evaluate

35. If aggregate supply is vertical, then which of the following statements must be true?

A. Aggregate demand does not affect the quantity of output.

B. Aggregate demand does not cause inflationary changes in price level.

C. Inflation will accompany any rise in output.

D. Inflation creates greater social benefits.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

36. In order to shift the vertical supply curve to the left, which of the following would have to occur?

A. increase in productivity

B. breakdown of key market institutions

C. expansion of potential GDP

D. flexible wage and price adjustments

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

37. Referring to a Keynesian Phillips curve, a reduction in inflation is likely to cause:

A. at least a slight increase in aggregate demand.

B. a vertical Phillips curve because aggregate supply remains fixed.

C. unemployment to remain constant in the long run.

D. at least a slight increase in unemployment.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

38. Why do neoclassical economists tend to put relatively more emphasis on long-term growth than on fighting recession?

A. price and wage stickiness is reasonable in the short run

B. government focuses more on recession and cyclical unemployment

C. standard of living is ultimately determined by long-term growth

D. upward trend of potential GDP determines the rate of inflation

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

39. A typical neoclassical aggregate supply (AS) curve ______________ and a typical neoclassical Phillips curve __________________.

A. slopes upward; slopes downward

B. is vertical; is vertical

C. is vertical; slopes downward

D. slopes upward; is vertical

Answer: B  Reference:

Explanation:

Type: Multiple Choice                   

40. A typical Keynesian aggregate supply (AS) curve _______________ and a typical Keynesian Phillips curve _____________.

A. is vertical; is vertical

B. slopes downward; slopes downward

C. slopes upward; slopes upward

D. slopes upward; slopes downward

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

           

           

41. Referring to the diagram above, complete the following sentence: Any increase in aggregate demand in the short-run will lead to:

A. an increase in output (Q1 to Q2), but it will also lead to prices increasing.

B. an increase in output (Q1 to Q2), but it will also lead to a recession.

C. a 45 degree supply curve, which will lead to increasing unemployment.

D. a 45 degree supply curve, which will lead to recession.

Answer: A  Reference:

Explanation:

Type: Multiple Choice                   

           

42. Referring to the diagram above, which of the following is a true statement?

A. The increase in supply (Q1 to Q2) may come about because of increased money supply.

B. The increase in output (Q1 to Q2) may come about because of lower levels of taxation.

C. The increase in supply (Q1 to Q2) may result from decreased government spending.

D. The increase in output (Q1 to Q2) may result from increased levels of taxation.

Answer:  B Reference:

Explanation:

Type: Multiple Choice                   

           

43. Referring to the diagram above, which of the following is a true statement?

A. Short-run increased output will lower output costs, but demand for higher profits will increase prices.

B. Higher cost levels will result because government will increase taxes as output rises.

C. Higher cost levels of increased output will force an increase in price for the product.

D. Short-run lower output costs will result because government will decrease taxes as output rises.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                    

44. A vertical aggregate supply curve, where the quantity of output is consistent with many different price levels, also implies:

A. an upward sloping Phillips curve.

B. a downward sloping aggregate demand curve.

C. a vertical aggregate demand curve.

D. a vertical Phillips curve.

Answer: D  Reference:

Explanation:

Type: Multiple Choice                   

45. If aggregate supply is vertical, then aggregate demand does not affect:

A. either wages or prices.

B. the causes of inflationary changes in price level.

C. the quantity of output.

D. inflationary pressures that accompanies any rise in output.

Answer: C  Reference:

Explanation:

Type: Multiple Choice                   

 Essay Questions

1. Explain what the neoclassical perspective on macroecomics emphasizes and briefly discuss its overall theme.

The neoclassical perspective on macroeconomics emphasizes that in the long run, the economy seems to rebound back to its potential GDP and its natural rate of unemployment.

The overall theme is not that Keynesian economics is “wrong” while neoclassical economics is “right,” nor vice versa, but rather that the two approaches complement each other, with Keynesian economics more useful for analyzing the macroeconomic short run and neoclassical economics more useful for the long run.

Reference:

Explanation:

Type: Essay                   

2. Identify and briefly explain the neoclassical argument and the key building blocks of neoclassical approach.

Neoclassical economics argues that over time, the economy adjusts back to its potential GDP level of output. The neoclassical approach is based on two key building blocks. First, over the long term the expansion of potential GDP due to economic growth will determine the size of the economy. Second, even if the Keynesian assumption of price and wage stickiness is reasonable in the short run, over the longer run, levels of prices and wages will adjust in a flexible manner.

Reference:

Explanation:

Type: Essay                   

3. Briefly discuss potential GDP in the neoclassical model, including how the curve is shown, what it determines, and how it operates over time.

In the neoclassical version of the model of aggregate supply and aggregate demand, potential GDP is shown as a vertical line. A vertical AS curve means that the level of aggregate supply (or potential GDP) will determine the real GDP of the economy, regardless of the level of aggregate demand. Over time, economic growth shifts potential GDP and the vertical AS curve gradually to the right.

Reference:

Explanation:

Type: Essay                   

4. Briefly discuss the aggregate supply curve in the neoclassical model, including how the curve is drawn, what it determines, and how it operates over time.

In the neoclassical model, the aggregate supply curve is drawn as a vertical line at the level of potential GDP. If AS is vertical, then it determines the level of real output, no matter where the aggregate demand curve is drawn. Over time, the AS curve shifts to the right as productivity increases and potential GDP expands.

Reference:

Explanation:

Type: Essay                   

5. The neoclassical supply and demand model description of a short-run shift from E0 to E1 and the long-run shift from E1 to E2 is a step-by-step way of making a simple point.  Briefly discuss this point.   

The economy can’t sustain production above its potential GDP in the long run. An economy may produce above its level of potential GDP in the short run, under pressure from a surge in aggregate demand. But over the long run, that surge in aggregate demand ends up as an increase in the price level, not as a rise in output.

Reference:

Explanation:

Type: Essay                   

6. Describe the affects that a decrease in aggregate demand because of a decline in consumer confidence that leads to less consumption and more saving in relation to the aggregate demand curve and the economy.

A decrease in aggregate demand because of a decline in consumer confidence that leads to less consumption and more saving causes the original aggregate demand curve AD0 to shift back to AD1. The shift from the original equilibrium E0 to the new equilibrium E1 results in a decline in output. As output falls below potential GDP, unemployment rises.

Reference:

Explanation:

Type: Essay                   

7. Briefly explain the neoclassical view with respect to the nature of the impact of changes in aggregate demand.

In the neoclassical view, changes in aggregate demand can have a short-run impact on output and on unemployment, but only a short-run impact. In the long run, when wages and prices are flexible, potential GDP and aggregate supply determine the size of real GDP.

Reference:

Explanation:

Type: Essay                   

8. Briefly describe what the Keynesian economists’ criticism of neoclassical theory regarding adjustment from recession is.

Keynesian economists argue that if the adjustment from recession to potential GDP takes a very long time, then neoclassical theory may be more hypothetical than practical.

Reference:

Explanation:

Type: Essay                   

9. Briefly describe what the theory of rational expectations holds and how long it typically takes rational expectations to affect economic adjustments.

The theory of rational expectations holds that people form the most accurate possible expectations about the future that they can using all information available to them. In an economy where most people have rational expectations, economic adjustments may happen very quickly.

Reference:

Explanation:

Type: Essay                   

10. Describe how a neoclassical long-run aggregate supply curve will affect the Phillips curve.

A neoclassical long-run aggregate supply curve will imply a vertical shape for the Phillips curve trade-off between inflation and unemployment.

Reference:

Explanation:

Type: Essay