Deck 3: The Keynesian Revolution

Question 1

What is meant by capacity utilization?

A) How much productive capacity can be effectively utilized.
B) How much productive capacity is currently being utilized.
C) The average utilization of capacity over the business cycle.
D) The capacity for utilizing something.

Answer 1

B

Question 2

The name of John Maynard Keynes' most famous book is

A) The General Theory of Employment, Interest and Money.
B) The Causes of Unemployment and Depression.
C) Principles of Macroeconomics.
D) The Theory of Capitalism.

Answer 2

A

Question 3

John Maynard Keynes is famous for

A) arguing that government should never intervene in the economy.
B) arguing that government should intervene in the economy only to protect private property.
C) arguing that governments should focus on providing incentives to business to increase aggregate supply.
D) his focus on the role of aggregate demand in the problems of inflation and unemployment.

Answer 3

D

Question 4

Keynes divided spending into four great flows which are

A) consumer spending on durable goods, consumer spending on nondurable goods, consumer spending on personal services, and consumer spending on financial services.
B) business spending on buildings, business spending on equipment, business spending on raw materials, and business spending on advertising.
C) consumer spending, business spending, government spending, and spending by foreign on exports.
D) government spending on welfare, government spending on the military, government spending on education, and government spending on Social Security.

Question 5

Income received by households will be used for

A) consumption, saving, and investment.
B) consumption, saving, and taxes.
C) consumption, investment, and exports.
D) consumption, investment, and transfers.

Question 6

In Keynes' analysis of the circular flow unused savings are

A) dollar bills and coins that people bury in their backyards.
B) income that households invest in purely financial investments.
C) the percentage of income that households receive that is not spent on immediate consumption goods.
D) income that households spend on frivolous consumption items.

Question 7

In Keynes' analysis of the circular flow, unintended inventories are

A) products produced by business that are recalled due to defects in production.
B) all increases in inventories maintained by businesses.
C) all increases in inventories that result from a surprising decline in sales.
D) all decreases in inventories that result from a surprising increase in sales.

Question 8

In Keynes' analysis of the circular flow, purely financial investments are

A) investments that produce no income for the investors.
B) investments that increase total aggregate demand.
C) investment that do not increase total aggregate demand.
D) investments that produce extraordinarily high incomes for investors.

Question 9

All of the following are examples of investment according to the Department of Commerce except

A) An automobile company replaces old paint machines with new ones.
B) An automobile company makes loans to consumers to finance the purchases of new cars.
C) An automobile company borrows money to build a new assembly plant.
D) An automobile dealer expands the number of new cars offered for sale on their parking lot.

Question 10

All of the following individual investments are not counted as investment by the Department of Commerce except for

A) An individual borrows $40,000 and spends it to install a new swimming pool on her property.
B) An individual borrows $40,000 to purchase stock in a swimming pool company.
C) An individual borrows $400,000 to purchase an already existing rental property.
D) An individual borrows $400,000 to buy gold.

Question 11

Unused savings, as defined in this chapter, are

A) savings that earn no income for the saver.
B) savings that the saver buries in the bank yard.
C) savings that earn very low incomes for the saver.
D) savings that are invested in financial instruments and not in new capital goods.

Question 12

The following are all aggregate markets discussed in this chapter except

A) The markets for aggregate output.
B) The market for loans and credit.
C) The labor market (for all wage and salaried workers, including day workers).
D) The market for aggregate exports and imports.

Question 13

Keynes disagreed with the neoclassical view of money and argued that

A) money is used only as a medium of exchange.
B) money is neutral in its impact on the economy.
C) money is used as a medium of exchange only in barter systems.
D) money is used as a medium of exchange and also is used to keep in reserve for emergencies.

Question 14

Progressive economists argue that recessions and depressions occur when

A) there is an unexpected outside shock to the economy.
B) aggregate demand is insufficient to purchase aggregate supply.
C) government intervenes and disturbs the process of equilibrium.
D) the Federal Reserve issues too much currency.

Question 15

Keynes stressed the importance of effective demand, which is

A) when business firms are effective in convincing consumers that they have a demand for certain goods.
B) when consumers have the desire for goods and services as well as the income to purchase these goods.
C) when the demand for goods and services is effective in satisfying individuals desires.
D) when aggregate demand is less than aggregate supply.

Question 16

Leakages from the circular flow include

A) savings, investment, and taxes.
B) savings, imports, and taxes.
C) exports, savings, and investment.
D) exports, investment, and imports.
E) investment, taxes, and imports.

Question 17

Conservatives and Keynesians differ on the appropriate response of the government to a recession. Which of the following is a true statement?

A) Keynesians believe that governments should increase spending to make up for a deficiency of aggregate demand.
B) Keynesians believe that governments should intervene in the economy only in the case of an outside shock.
C) Keynesians believe that governments do not need to intervene, because the economy is always in equilibrium.
D) Keynesians believe that governments can prevent an outside shock.

Question 18

According to Keynesian economists, the problem in the Great Depression was

A) a major outside shock.
B) deficit spending by the government.
C) a lack of effective demand.
D) government interfering with the natural tendency of the economy to restore equilibrium.

Question 19

At very low levels of income, consumer spending is likely to be

A) less than income.
B) greater than income.
C) the same as income.
D) the same as savings.

Question 20

The wealthy tend to have

A) higher average propensities to consume.
B) higher average propensities to save.
C) lower average propensities to save.
D) the same average propensity to consume as less wealth persons.

Question 21

If the objective of government policy during a recession is to increase aggregate demand, then it should

A) raise income taxes.
B) increase government spending.
C) decrease government transfers.
D) decrease government spending.

Question 22

The circular flow of money refers to

A) money moving from households to businesses and from businesses to households.
B) money moving from government to households and from households to government.
C) money moving from businesses to government and from government to businesses.
D) money moving from one household to another.