Deck 23: The Keynesian Framework

Question 1

When examining the causes of unemployment, Keynes focused on

A) financial markets.
B) inflationary expectations.
C) changes in technology.
D) aggregate demand.

Answer 1

D

Question 2

According to Keynes,

A) prices decline as inventories increase.
B) prices increase as inventories increase.
C) prices decrease as inventories decrease.
D) prices are sticky and will probably not respond to a change in inventories.

Answer 2

D

Question 3

Assume a consumption function of the following form: C = 500 + .9Y. If income rises by $100, consumption will increase by

A) $90.
B) $550.
C) $590.
D) $600.

Answer 3

B

Question 4

Assume a consumption function of the following form: C = 100 + .8Y. If income is equal to $3,000, then consumption is

A) $2,400.
B) $2,500.
C) $2,900.
D) $3,100.

Question 5

If total consumption spending is $1,000, the marginal propensity to consume is 0.6, and total output is $2,000, then the constant term is

A) $800.
B) $1,000.
C) $2,000.
D) $1,200.

Question 6

In the Keynesian model when desired investment exceeds desired saving,

A) inventories rise.
B) inventories fall.
C) the price level rises.
D) the price level falls.

Question 7

In the standard consumption function of C = a + bY, the MPC is

A) Y.
B) bY.
C) a.
D) b.

Question 8

Keynesian theory emphasizes

A) aggregate supply.
B) rational expectations.
C) short-run analysis.
D) Say's Law.

Question 9

Keynes argued that if the economy is in a severely depressed state then __________ is constant.

A) real GDP
B) the price level
C) velocity
D) nominal GDP

Question 10

In a simple Keynesian model, an increase in income leads to an increase in

A) savings.
B) investment.
C) the price level.
D) the money supply.

Question 11

Which of the following is not reflected in the constant term associated with the marginal propensity to consume?

A) The level of C if Y were zero
B) People's consumption with zero income
C) All other influences on consumption besides income
D) All of the above are reflected in the constant term.

Question 12

The marginal propensity to consume is assumed to be

A) greater than 1.
B) less than 1.
C) greater than 2.
D) less than 0.5.

Question 13

In the Keynesian model, when desired saving exceeds desired investment,

A) inventories rise.
B) inventories fall.
C) the price level rises.
D) the price level falls.

Question 14

If the marginal propensity to consume is 0.7 and if output increases by $200, then consumption spending

A) increases by $70.
B) decreases by $70.
C) increases by $140.
D) decreases by $140.

Question 15

In a simple Keynesian model, a decrease in income leads to a decrease in

A) consumption.
B) investment.
C) the price level.
D) the money supply.

Question 16

If consumption increases by $400 when income increases by $500, then the marginal propensity to consume is

A) 900.
B) 100.
C) 1.20.
D) 0.80.

Question 17

In the Keynesian model, an unwanted decrease in inventories leads to

A) falling interest rates.
B) rising unemployment.
C) rising output.
D) falling money wages.

Question 18

In the simple Keynesian framework, the price level

A) is fixed.
B) varies directly with unemployment.
C) varies inversely with wages.
D) is indeterminate.

Question 19

In the Keynesian model, a build-up of unwanted inventories leads to

A) rising interest rates.
B) falling unemployment.
C) falling output.
D) falling money wages.

Question 20

If consumption equals $1,000 when income is $1,000 and increases to $1,900 when income increases to $2,000, then the marginal propensity to consume is

A) 0.50.
B) 0.90.
C) 1.00.
D) 2.00.

Question 21

If the MPC is b, then the multiplier is

A) 1/(1 - b).
B) b/(1 - b).
C) 1/(1 + b).
D) b/(1 + b).

Question 22

The formula for the effect of any change in autonomous spending, △A, where b equals the MPC is

A) △Y = △A [1/(1 ‑ b)].
B) △Y = △A [b/(1 ‑ b)].
C) △Y = △A [1/(1 + b)].
D) △Y = △A [b/(1 + b)].

Question 23

In an economy with no taxes, an income level of $400 billion, consumption of $300 billion, and government spending of $25 billion, saving is equal to

A) $25 billion.
B) $100 billion.
C) $275 billion.
D) $375 billion.

Question 24

If the MPC is 0.9, then an increase in taxes of $100 can be expected to __________ consumption by the amount of __________.

A) increase; $90
B) decrease; $90
C) increase; $100
D) decrease; $100

Question 25

If the consumption function can be described as C = 200 + .80Y, the marginal propensity to save is equal to

A) -0.80.
B) 0.80.
C) 0.20.
D) 200.

Question 26

In the simple Keynesian expenditure model, a marginal propensity to consume of .9 leads to an expenditure multiplier of

A) )1.
B) )9.
C) 9.
D) 10.

Question 27

Which of the following is a plausible explanation for a downward shift in the consumption function?

A) A decline in home values
B) A decline in wages
C) A decrease in the personal income tax rate
D) A rise in wages

Question 28

Which of the following is an example of an autonomous spending change?

A) An increase in investment caused by a technological innovation
B) An increase in consumption caused by an increase in interest income
C) An increase in tax revenue caused by a rise in GDP
D) An increase in saving caused by a rise in income

Question 29

In the Keynesian view, the main source of economic fluctuations is

A) interest rates.
B) investment.
C) consumption.
D) inflation.

Question 30

If consumption behavior can be described as C = 50 + .8Y, then the saving function is

A) S = 50 + .2Y.
B) S = -50 + .2Y.
C) S = -50 + .8Y.
D) S = 50 + .8Y.

Question 31

Assume a consumption function of C = 90 + .75Y. The saving function for this economy is equal to

A) 90 + .25Y.
B) -90 + .75Y.
C) -90 + .25Y.
D) 90 + .75Y.

Question 32

In the Keynesian model, an increase in government spending increases

A) the money supply by an equal amount.
B) the money supply by a multiple amount.
C) aggregate demand by an equal amount.
D) aggregate demand by a multiple amount.

Question 33

Which of the following could lead to an upward shift in the consumption function?

A) A decrease in home values
B) A decline in wages
C) An increase in stock prices
D) A rise in wages

Question 34

An increase in interest rates will cause investment to

A) increase.
B) decrease.
C) not change.
D) move erratically, depending on the interest rate effect on saving.

Question 35

Using the simple Keynesian model with a consumption function of C = 200 + .9Y, an $10 change in desired investment leads to a change in equilibrium income of

A) $10.
B) $100.
C) $20.
D) $90.

Question 36

In the Keynesian model consumption is primarily determined by __________ and investment is primarily determined by __________.

A) the price level; income
B) income; the interest rate
C) income; the price level
D) the interest rate; income

Question 37

In the simple Keynesian model which has no taxes and a saving function which is in the form S = -80 + .20Y, a $200 increase in desired investment leads to an increase in equilibrium income of

A) $40.
B) $100.
C) $400.
D) $1000.

Question 38

In the standard consumption function of C = a + bY, a change in corporate stock prices would be reflected by a change in

A) Y.
B) b.
C) a.
D) both A and B.

Question 39

In the Keynesian model, a decline in interest rates will cause investment to

A) increase.
B) decline.
C) remain unchanged.
D) move erratically, depending on the interest rate effect on saving.

Question 40

Consumption spending is __________ and investment spending is __________ in the Keynesian model.

A) autonomous; autonomous
B) autonomous; induced
C) induced; autonomous
D) induced; induced

Question 41

According to Keynes, it is __________ to have __________ holding money.

A) possible; capital gains or losses from
B) impossible; capital gains and losses from
C) possible; a higher opportunity cost of
D) impossible; a lower opportunity cost of

Question 42

In the Keynesian model, which of the following will cause a reduction in interest rates?

A) An increase in money demand
B) An increase in money supply
C) An increase in saving
D) A decline in saving

Question 43

In the Keynesian model, interest rates are determined by

A) aggregate demand and aggregate supply.
B) saving and investment.
C) the demand for and supply of money.
D) the velocity of money.

Question 44

In the Keynesian model, money demand is positively related to

A) income.
B) interest rates.
C) saving.
D) aggregate supply.

Question 45

In Keynes' concept of the liquidity trap,

A) monetary policy becomes more effective as interest rates fall below normal.
B) people wish to hold more bonds as interest rates fall below normal.
C) people wish to hold fewer bonds as interest rates fall below normal.
D) there is a need for more liquidity in the banking system.

Question 46

In the Keynesian model, liquidity preference refers to the

A) demand for capital.
B) demand for consumer goods.
C) demand for money.
D) money supply.

Question 47

As a result of a decline in the expected rate of return on investment, GDP would not have to fall if the government __________ taxes or __________ government spending.

A) increased; increased
B) increased; decreased
C) decreased; increased
D) decreased; decreased

Question 48

If autonomous investment spending falls as a result of a decline in the expected rate of return on investment, GDP would not have to fall if the government __________ taxes or __________ government spending.

A) increased; increased
B) increased; decreased
C) decreased; increased
D) decreased; decreased

Question 49

In the Keynesian model, which of the following will cause an increase in interest rates?

A) An increase in money demand
B) An increase in money supply
C) An increase in saving
D) A decline in saving

Question 50

An individual anticipating rising interest rates is likely to hold more

A) money.
B) real assets.
C) stock.
D) bonds.

Question 51

In the Keynesian model, the demand for money is inversely related to

A) investment.
B) the money supply.
C) the interest rate.
D) the saving rate.

Question 52

In the Keynesian model, changes in the money supply cause changes in

A) saving.
B) investment.
C) government spending.
D) aggregate supply.

Question 53

__________ consumption will __________ as a result of a decrease in taxes.

A) Autonomous; decrease
B) Autonomous; increase
C) Induced; decrease
D) Induced; increase

Question 54

In the Keynesian model, if interest rates fall below what people consider normal, households will respond by

A) decreasing the saving rate.
B) reducing the saving rate.
C) holding more money.
D) holding more bonds.

Question 55

An increase in the money supply in the simple Keynesian model causes

A) income to fall.
B) inventories to rise.
C) interest rates to fall.
D) investment to fall.

Question 56

If an person believes that it is likely that interest rates will increase, she is likely to hold less

A) money.
B) real assets.
C) stock.
D) bonds.

Question 57

Unlike the Classical economists, Keynes believed that money could affect real economic activity through its effects on

A) the price level.
B) the interest rate.
C) savings.
D) velocity.

Question 58

In the Keynesian model, if interest rates rise above what people consider normal, households will respond by

A) increasing the saving rate.
B) reducing the saving rate.
C) holding more money.
D) holding more bonds.

Question 59

According to Keynes, the key difference between money and bonds is that

A) money is an asset.
B) bonds are an asset.
C) money is less risky.
D) bonds are tax exempt.

Question 60

In the Keynesian model, portfolio decisions of individuals determine the

A) inflation rate.
B) money supply.
C) interest rate.
D) GDP.

Question 61

In the "cost of capital channel" of monetary policy, a higher interest rate __________ spending.

A) raises consumption
B) raises investment
C) lowers consumption
D) lowers investment

Question 62

If the interest rate rose above the equilibrium rate, people would attempt to __________ bonds. Bond prices would __________ and the interest rate would __________.

A) sell; rise; fall
B) buy; rise; fall
C) sell; fall; rise
D) buy; rise; rise

Question 63

In the aggregate demand and supply framework, an increase in the money supply will shift the aggregate

A) demand curve to the right.
B) demand curve to the left.
C) supply curve to the left.
D) supply curve to the right.

Question 64

As part of the "exchange rate channel of monetary policy," a higher money supply causes a __________ interest rate and thus __________ of the domestic currency.

A) higher; appreciation
B) higher; depreciation
C) lower; appreciation
D) lower; depreciation

Question 65

In terms of the aggregate demand and supply framework, a decrease in the money supply will shift the aggregate

A) demand curve to the right.
B) demand curve to the left.
C) supply curve to the left.
D) supply curve to the right.

Question 66

As part of the "wealth channel of monetary policy," a higher money supply __________ bond prices and thus __________ spending.

A) raises; raises consumption
B) raises; raises investment
C) lowers; lowers consumption
D) lowers; lowers investment

Question 67

In the Keynesian world a falling real money supply causes GDP to __________ by __________ the real interest rate which causes a(n)__________ in investment.

A) increase; increasing; increase
B) increase; decreasing; increase
C) decrease; increasing; increase
D) decrease; increasing; decrease

Question 68

As part of the "wealth channel of monetary policy," a lower money supply __________ interest rates and thus __________ bond prices.

A) raises; raises
B) raises; lowers
C) lowers; raises
D) lowers; lowers

Question 69

The aggregate demand curve is negatively sloped because a lower price level

A) reduces the real money supply.
B) increases the real money supply.
C) reduces aggregate income.
D) increases aggregate income.

Question 70

If an individual earns $1,500 a month and spends it evenly throughout the month, transaction balances will average

A) $50 per month.
B) $750 per month.
C) $1500 per month.
D) $3000 per month.

Question 71

In the "cost of capital channel" of monetary policy, a lower interest rate __________ spending.

A) raises consumption
B) raises investment
C) lowers consumption
D) lowers investment

Question 72

If the interest rate fell below the equilibrium rate, people would attempt to __________ bonds. Bond prices would __________ and the interest rate would __________.

A) sell; rise; fall
B) buy; rise; fall
C) sell; fall; rise
D) buy; fall; rise

Question 73

Which of the following will cause the aggregate demand curve to shift to the right?

A) An increase in the price level
B) An increase in the interest rate
C) An increase in money demand
D) An increase in investment expenditures

Question 74

As part of the "exchange rate effect of monetary policy," a lower money supply causes a __________ interest rate and thus __________ of the domestic currency.

A) higher; appreciation
B) higher; depreciation
C) lower; appreciation
D) lower; depreciation

Question 75

According to the Keynesian view of the demand for money, an increase in uncertainty will cause

A) a decrease in interest rates.
B) an increase in interest rates.
C) an increase in aggregate income.
D) an increase in consumption.

Question 76

As part of the "wealth channel of monetary policy," a higher money supply __________ interest rates and thus __________ bond prices.

A) raises; raises
B) raises; lowers
C) lowers; raises
D) lowers; lowers

Question 77

As part of the "exchange rate effect of monetary policy," a lower money supply causes __________ of the domestic currency and thus __________ net exports.

A) appreciation; rising
B) appreciation; falling
C) depreciation; rising
D) depreciation; falling

Question 78

As part of the "wealth channel of monetary policy," a lower money supply __________ bond prices and thus __________ spending.

A) raises; raises consumption
B) raises; raises investment
C) lowers; lowers consumption
D) lowers; lowers investment

Question 79

In the Keynesian world a rising real money supply causes GDP to __________ by __________ the real interest rate which causes a(n)__________ in investment.

A) increase; increasing; increase
B) increase; decreasing; increase
C) decrease; increasing; increase
D) decrease; increasing; decrease

Question 80

As part of the "exchange rate effect of monetary policy," a higher money supply causes __________ of the domestic currency and thus __________ net exports.

A) appreciation; rising
B) appreciation; falling
C) depreciation; rising
D) depreciation; falling