Deck 11: Classical and Keynesian Macro Analyses

Question 1

Say's law explains

A) how long-term real Gross Domestic Product (GDP) stability is achieved in the classical model.
B) how long-run real Gross Domestic Product (GDP) stability is achieved in the Keynesian model.
C) how the economy can go into recession.
D) why economies experience business cycles.

Answer 1

A

Question 2

All the following are assumptions of the classical model EXCEPT

A) pure competition exists.
B) buyers and sellers react to nominal money prices rather than to relative prices.
C) people are motivated by self-interest.
D) wages and prices are flexible.

Answer 2

B

Question 3

Say's law argues that I. overproduction is typical in a market economy.
II) supply creates its own demand.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Answer 3

B

Question 4

The idea that supply creates its own demand is known as

A) the law of diminishing returns.
B) Murphy's law
C) Keynes' law.
D) Say's law.

Question 5

The classical model uses the assumption that

A) all wages and prices are flexible.
B) monopoly is widespread in the economy.
C) interest rates are not flexible.
D) economic markets are fragile and have no tendency to move towards an equilibrium.

Question 6

Say's law states that

A) supply creates its own demand.
B) supply and demand are never equal.
C) demand may be greater than supply.
D) supply will usually be greater than demand.

Question 7

Classical economists wrote from the 1770s to the ________.

A) 1850s
B) 1890s
C) 1930s
D) 1960s

Question 8

Which of the following is NOT a major assumption of the classical model?

A) People are motivated by self-interest.
B) People can be fooled by money illusion.
C) Prices are flexible.
D) Wages are flexible.

Question 9

Which of the following is NOT an assumption of the classical model?

A) Wages and prices are fixed.
B) People are motivated by the own self-interest.
C) Pure competition exists.
D) Buyers react to changes in relative prices.

Question 10

The first systematic attempt to explain the determinants of the price level and national levels of income, employment, consumption and real Gross Domestic Product (GDP) was made by ________ economists.

A) Keynesian
B) supply-side
C) monetarist
D) classical

Question 11

The implication of Say's law is that

A) Gross Domestic Product is the same whether we use the expenditure approach or the income approach.
B) a barter economy is the most efficient economy.
C) increased consumption today leads to increased production tomorrow.
D) overproduction in a market economy is not possible.

Question 12

Whom among the following was a classical economist?

A) Adam Smith
B) A. C. Pigou
C) David Ricardo
D) all of the above

Question 13

"Supply creates its own demand" is known as

A) Smith's law.
B) Say's law.
C) the circular flow.
D) the Ricardian dilemma.

Question 14

If a consumer buys less gasoline because gas prices decreased by 10 percent, even though all other prices have also decreased by 10 percent, then

A) the consumer is paying too close attention to changes in relative prices.
B) wages and prices are too flexible.
C) the consumer has been fooled by money illusion.
D) inflation is not a problem in the economy.

Question 15

All of the following were classical economists EXCEPT

A) Adam Smith.
B) A. C. Pigou.
C) David Ricardo.
D) Milton Friedman.

Question 16

According to the classical model, the income generated by production is

A) enough to meet the needs of everyone in society.
B) enough to purchase all the goods and services produced.
C) fully spent on savings.
D) always insufficient to purchase all the goods and services produced.

Question 17

Which of the following is an example of money illusion?

A) An individual is willing to work more hours when the nominal wage rises by 10 percent and the overall price level rises by 5 percent.
B) An individual is willing to work more hours when the nominal wage rises by 10 percent and the overall price level rises by 20 percent.
C) An individual will neither increase nor decrease the number of hours she is willing to work when the nominal wage rises by 10 percent and the overall price level rises by 10 percent.
D) none of the above

Question 18

In the classical model, an increase in aggregate demand will cause

A) an increase in actual output, or Gross Domestic Product (GDP).
B) a decrease in actual output, or Gross Domestic Product (GDP).
C) an increase in price level.
D) a decrease in price level.

Question 19

Classical economists assumed that

A) prices were flexible.
B) individuals did not suffer from money illusion.
C) wages were flexible.
D) all of the above

Question 20

Say's law says that

A) consumption is greater than supply.
B) desired expenditures always equal actual expenditures.
C) people produce the goods they consume.
D) people consume the goods they produce.

Question 21

According to classical economists

A) Say's law is not valid.
B) unemployment will not be a serious problem in a market economy.
C) wage levels are always "sticky."
D) demand stimulus is needed to produce full employment.

Question 22

At higher rates of interest

A) households save less and businesses invest more.
B) households save less and businesses invest less.
C) households save more and businesses invest less.
D) households save more and businesses invest more.

Question 23

In the classical model, aggregate demand and aggregate supply will

A) not exist.
B) intersect at less than full employment.
C) intersect at the point of full employment.
D) not intersect.

Question 24

Suppose Moni thinks a 100 percent increase in her hourly wage as an incentive to work more hours while the price level also increases by 100 percent. Moni is said to be suffering from

A) money illusion.
B) rationality.
C) irrationality.
D) the effects of competition.

Question 25

According to the circular flow of income and output, saving causes

A) total output to fall.
B) consumption expenditures and total output to fall.
C) consumption expenditures to fall short of total output.
D) investment spending to fall.

Question 26

One tenet of classical economics is that

A) the role of the government should be limited, since the market will always be self-correcting.
B) the government should intervene whenever necessary to avoid any unemployment.
C) wages and prices are "sticky downward."
D) the government should set a minimum wage slightly above the natural market equilibrium rate.

Question 27

A classical model of the economy predicts

A) full employment in the long run.
B) a negative unemployment rate whenever the economy is in equilibrium.
C) the same unemployment rates as the Keynesian model.
D) cyclical changes in the unemployment rate.

Question 28

If you feel you are better off because you receive a 5 percent raise even when the price level also increases by 5 percent, then you are a victim of the

A) real income effect.
B) money income effect.
C) money illusion.
D) purchasing power effect.

Question 29

Which of the following is NOT an assumption of the classical model?

A) Wages and prices are flexible.
B) People are motivated by self-interest.
C) Money illusion exists.
D) Pure competition exists.

Question 30

All of the following are assumptions of the classical model EXCEPT

A) inflexible wages.
B) absence of money illusion.
C) pure competition.
D) self-interest of economic actors.

Question 31

Which of the following statements about the classical model of the economy is FALSE?

A) Savings and investment will always be equal.
B) Wages and prices are flexible.
C) The economy will always move toward, or be at, full employment.
D) Individuals pursue the public interest, not their own self-interest.

Question 32

Classical economists tend to

A) see unemployment as a persistent economic problem.
B) believe in Keynesian economics.
C) reject the equality of savings and investment.
D) support Say's law.

Question 33

One key assumption of the classical model is

A) government spending plays a major role.
B) money illusion cannot fool workers.
C) wages are sticky.
D) prices are sticky.

Question 34

A key assumption in the classical model is

A) sticky wages.
B) pure competition.
C) sticky prices.
D) the government's ability to stabilize the economy.

Question 35

According to the classical model, more saving leads to more investment because

A) the people who save are the same people who invest.
B) the interest rate adjusts to keep investment equal to saving.
C) saving and investment are two sides of the same activity.
D) the interest rate is set by the federal government.

Question 36

An individual who suffers from money illusion will

A) feel that the same percentage increase in prices and income improves his economic position.
B) concentrate on relative prices.
C) never be fooled by the impact of price changes on the purchasing power of income.
D) only be concerned about the prices of a few goods.

Question 37

An individual who is suffering from money illusion is more concerned with

A) relative prices than with nominal prices.
B) relative prices than with real prices.
C) nominal prices than with relative prices.
D) real prices than with nominal prices.

Question 38

The classical model assumes that

A) imperfect competition predominates in most markets.
B) people have money illusion.
C) wages and prices are flexible.
D) wages are flexible but prices are not.

Question 39

Which of the following statements is correct? I. If other factors are held constant, the level of employment in the economy determines real Gross Domestic Product (GDP).
II) According to classical economists, only voluntary unemployment exists in the long run.

A) I only
B) II only
C) Both I and II
D) Neither I nor II

Question 40

In the classical model, an increase in the unemployment rate

A) will persist when the reduction in output is caused by a reduction in aggregate demand.
B) will result in an increase in the price level if the reduction in output is caused by a change in aggregate demand.
C) will likely be temporary.
D) is a signal of demand-pull inflation.

Question 41

In economics, investment is defined as

A) the spending by businesses on capital goods and inventories.
B) the spending by households on human capital and durable goods.
C) disposable income minus consumption.
D) disposable income plus consumption.

Question 42

According to classical theory, total employment and real Gross Domestic Product (GDP) are

A) unrelated.
B) positively related.
C) inversely related.
D) negatively related.

Question 43

According to classical theory, desired saving always equals investment due to changes in

A) prices.
B) wages.
C) the interest rate.
D) taxes.

Question 44

The classical economists argued that planned saving and planned investment will always be equal because of changes in

A) the level of real disposable income.
B) the interest rate.
C) the price level.
D) wages.

Question 45

Classical economists argued that

A) there would always be an excess of saving over investment.
B) workers had money illusion.
C) excess savings would create unemployment.
D) a flexible interest rate would make saving equal to investment.

Question 46

According to classical theory, a shift in aggregate demand will affect

A) the price level only.
B) real Gross Domestic Product (GDP) only.
C) the level of employment only.
D) both real Gross Domestic Product (GDP) and the level of employment.

Question 47

According to the classical model, an increase in aggregate demand would

A) lead the economy to recession.
B) lead the economy to a deflationary cycle.
C) cause an adjustment to a higher price level.
D) raise real Gross Domestic Product (GDP) but leave the price level unchanged.

Question 48

In the classical model, desired saving

A) exceeds investment.
B) is inversely related to real income.
C) is equal to desired investment.
D) is less than desired investment.

Question 49

According to classical theory, full employment in the labor market occurs

A) whenever aggregate demand is less than aggregate supply.
B) at a wage rate at which quantity demanded equals quantity supplied.
C) only when the economy has just experienced a demand shock.
D) only when actual expenditures are greater than desired expenditures.

Question 50

According to classical economists, a decrease in the rate of interest will

A) increase unemployment.
B) increase consumer saving.
C) increase investment.
D) increase the inflation rate.

Question 51

In the classical model, the aggregate supply curve is

A) upward sloping in the short run but vertical in the long run.
B) always vertical.
C) the same as the aggregate supply curve in the Keynesian model.
D) flat at low levels of output and then eventually slopes upward as output increases.

Question 52

The equilibrating force in the credit market in the classical model is

A) the interest rate.
B) the price level.
C) full employment.
D) fiscal policy.

Question 53

In the classical model, a shift to the right in aggregate demand would result in

A) a permanent increase in unemployment.
B) a permanent increase in real incomes.
C) an increase in the price level.
D) a permanent shift past full employment.

Question 54

In the classical model, what occurs if a wage of $20/hour results in unemployed workers?

A) The workers will go on strike to demand that more jobs be created.
B) Producers will quickly create more jobs and hire the unemployed workers, so unemployment is short-lived.
C) The wage rate will drop, more workers will be hired, and the unemployment rate falls.
D) The government will step in and order firms to hire more workers.

Question 55

With respect to unemployment, the classical model states that

A) unemployment of any kind cannot exist.
B) only voluntary unemployment exists.
C) unemployment fluctuates with the interest rate.
D) involuntary unemployment will always exceed voluntary unemployment.

Question 56

Suppose an economy originally in long-run equilibrium experiences a decrease in aggregate demand. According to the classical model

A) real Gross Domestic Product (GDP) will not change but the price level will fall.
B) real Gross Domestic Product (GDP) will fall, and then the price level will fall also.
C) the price level will not change but real Gross Domestic Product (GDP) will fall.
D) real Gross Domestic Product (GDP) will fall, wages will fall, but the prices of goods and services will stay the same.

Question 57

In the classical model, real Gross Domestic Product (GDP) per year is

A) due to supply conditions plus the extent of government intervention in the economy.
B) determined by supply and demand conditions together.
C) supply determined.
D) demand determined.

Question 58

In the classical model, the aggregate supply curve is

A) upward sloping.
B) downward sloping.
C) horizontal.
D) vertical.

Question 59

According to the classical theory, an inward shift in aggregate demand would reduce

A) real Gross Domestic Product (GDP) and the price level.
B) the price level but have no effect on real Gross Domestic Product (GDP).
C) real income but have no impact on the price Gross Domestic Product (GDP).
D) the price level but increase real Gross Domestic Product (GDP).

Question 60

Individuals will increase their saving as

A) the interest rate falls.
B) business investment falls.
C) the rate of inflation increases.
D) the interest rate increases.

Question 61

Which of the following is NOT an assumption of the classical model?

A) Wages and prices are flexible.
B) Inflation will lead to money illusion.
C) People are motivated by self-interest.
D) Pure competition exists.

Question 62

The condition of fully flexible wages and prices was assumed by

A) the classical economists.
B) the Keynesian economists.
C) modern economists.
D) no economists.

Question 63

Say's law implies that

A) surpluses never occur.
B) surpluses or shortages are possible, but only for a short time.
C) shortages is a persistent phenomenon.
D) shortages never occur.

Question 64

According to the classical economists, actual real GDP

A) always equals actual aggregate income.
B) sometimes equals actual aggregate income.
C) never equals actual aggregate income.
D) is not related to aggregate income.

Question 65

The concept that producing goods and services generates the means and the willingness to purchase other goods and services is

A) the Keynesian approach.
B) money illusion.
C) Say's law.
D) secular deflation.

Question 66

"Supply creates its own demand" is known as

A) Keynes' Rule.
B) Murphy's law
C) Smith's law.
D) Say's law.

Question 67

According to the classical economists, an economy producing $10 million in goods and services

A) may be producing too much since the needs of people may not be this great.
B) simultaneously generates the income necessary to purchase $10 million in goods and services.
C) is supplying $10 million in goods and services, but could be demanding more or less than $10 million in goods and services for a very long period of time.
D) could experience a permanent surplus if no one has estimated the demand for goods and services in the economy.

Question 68

Given the assumptions of the classical model

A) the economy will often experience recessions and expansions.
B) expansion will be the normal condition, but recessions will often be severe and require government intervention.
C) the macroeconomy is erratic, and problems will often be increased over time.
D) the market is a self-correcting mechanism.

Question 69

An assumption of the classical model is that

A) money illusion is widespread.
B) people make decisions based on nominal prices rather than real prices.
C) prices are flexible while wages are inflexible.
D) people are motivated by self-interest.

Question 70

According to Say's law

A) desired expenditures are always less than actual production.
B) desired production are always more than actual production.
C) desired expenditures are always equal to actual expenditures.
D) desired expenditures cannot be compared with actual expenditures.

Question 71

The approach to understanding the determination of real GDP and the price level that emphasizes flexible wages and prices and competitive markets is

A) the classical model.
B) the Keynesian model.
C) Adam Smith's Law.
D) Murphy's Law.

Question 72

Which of the following is NOT true according to Say's law?

A) Supply creates its own demand.
B) No overproduction is possible in a market economy in the long run.
C) Desired expenditures will always be higher than actual expenditures.
D) Producing goods and services generates the means and the willingness to purchase other goods and services.

Question 73

Which of the following is NOT an assumption of the classical model?

A) Buyers and sellers react to changes in relative prices.
B) Households want to maximize economic well being.
C) No single buyer or seller of a commodity can affect its price.
D) Wages and prices will move freely in the upward direction but not the downward direction.

Question 74

Which of the following statements is NOT true about Say's law?

A) Desired expenditures will equal actual expenditures.
B) Surpluses will be eliminated by falling prices and shortages will be eliminated by increasing prices.
C) People produce more goods than they want for their own use only if they seek to trade them for other goods.
D) Markets would be regularly hit by severe shortages and surpluses.

Question 75

Say's law states that

A) desired expenditures will equal actual expenditures.
B) people produce only the goods they want.
C) demand is always less than supply.
D) overproduction is never possible because of limited resources.

Question 76

The classical economists assumed that

A) monopoly was widespread in the economy.
B) government intervention in the economic system was necessary and helpful.
C) wages and prices were sticky in going downward.
D) wages and prices were flexible.

Question 77

According to classical theory, any changes in aggregate demand will

A) lead to changes in the price level.
B) lead to changes in real Gross Domestic Product (GDP), but not in the price level.
C) lead to changes in both real Gross Domestic Product (GDP) and the price level.
D) have no affect on prices or real Gross Domestic Product (GDP).

Question 78

According to the classical theory, the aggregate supply curve is

A) downward sloping.
B) horizontal.
C) upward sloping.
D) vertical.

Question 79

Say's law implies that

A) consumers' willingness to spend is unrelated to the production of goods and services.
B) producing goods and services generates the means and the willingness to purchase other goods and services.
C) prices and wages are sticky upwards.
D) wages and prices are inflexible.

Question 80

In a classical model

A) equilibrium real GDP is supply determined.
B) equilibrium real GDP is determined by the government.
C) equilibrium real GDP is determined by both aggregate supply and aggregate demand.
D) equilibrium real GDP is neither determined by aggregate supply nor by aggregate demand.