Question 1

The consumption function shows the relationship between
A)planned consumption expenditures and disposable income.
B)permanent income and savings.
C)business inventory and real GDP.
D)aggregate demand and aggregate consumption.

Accepted Answer

The consumption function shows how much households plan to spend on consumption goods and services at any given level of disposable income. It is a relationship between planned consumption expenditures and disposable income.

Question 2

Use the figure below to answer the following question(s).
Figure 11-1 
-Refer to Figure 11-1. Consider the short-run aggregate supply curve SRAS. What is the segment between a and b called?
A)the new classical range
B)the Keynesian range
C)the flexible wage and price range
D)the balanced budget range

Accepted Answer

The segment between a and b on the short-run aggregate supply curve SRAS is typically referred to as the Keynesian range, where output can increase without causing a rise in the price level.

Question 3

Keynesian analysis implies that potential output and price stability can be achieved if
A)the federal budget is balanced annually.
B)marginal tax rates are kept low so the incentive to produce will be strong.
C)aggregate demand is equal to the economy's full-employment rate of output.
D)current saving exceeds the level of investment.

Accepted Answer

According to Keynesian analysis, potential output and price stability can be achieved if aggregate demand is equal to the economy's full-employment rate of output. This means that the economy is operating at its maximum capacity and there is no pressure on prices to rise. Balancing the federal budget annually or keeping marginal tax rates low may not necessarily lead to achieving potential output and price stability. Current saving exceeding investment may lead to a lack of demand and a recessionary gap.

Question 4

Use the figure below to answer the following question(s).
Figure 11-3 
-Refer to Figure 11-3. If the economy is currently operating at point a, which of the following would a Keynesian economist be most likely to favor?
A)a tax cut
B)an increase in government expenditures
C)a shift to a more expansionary monetary policy
D)a reduction in the budget deficit

Accepted Answer

The answer of Use the figure below to answer the...

Question 5

Figure 11-4 
-According to Keynesian analysis, which of the following policy combinations would most likely to move the economy illustrated in Figure 11-4 to full employment?
A)increase both taxes and government transfer payments
B)reduction in government purchases and increase in taxes
C)increase in government purchases and reduction in taxes
D)increase in taxes to reduce the government deficit

Accepted Answer

Keynesian economics suggests that increasing government purchases and reducing taxes can stimulate aggregate demand, leading to higher output and employment, thus moving the economy towards full employment.

Question 6

Because of automatic stabilizers, government budget deficits are
A)positive during both expansions and contractions.
B)negative during both expansions and contractions.
C)zero if averaged out over the entire business cycle.
D)larger during expansions and smaller during contractions.
E)smaller during expansions and larger during contractions.

Accepted Answer

Automatic stabilizers refer to government programs or policies that automatically expand during economic downturns and contract during economic expansions. Examples include unemployment insurance, welfare programs, and progressive income taxes. During expansions, tax revenues increase and unemployment benefits decrease, leading to a smaller government budget deficit or even a surplus. During contractions, tax revenues decrease and unemployment benefits increase, leading to a larger government budget deficit. Therefore, the answer is that government budget deficits are smaller during expansions and larger during contractions.

Question 7

Long lags make discretionary policy less effective because
A)by the time the impact of a policy is felt, the problem may have been corrected by market forces.
B)it is easier to forecast an expansion than a recession.
C)it is easier to forecast a recession than an expansion.
D)automatic stabilizers are subject to longer lags than are discretionary policies.

Accepted Answer

Long lags mean that the impact of a policy will not be felt until much later, which means that by the time it takes effect, the problem could already have been solved by other market forces. This reduces the effectiveness of discretionary policy, as it may not have the intended impact.

Question 8

Which of the following is the primary source of changes in output within the framework of Keynesian analysis?
A)changes in the price level
B)changes in aggregate demand
C)changes in interest rates
D)changes in wage rates

Accepted Answer

According to Keynesian analysis, the primary source of changes in output (GDP) is changes in aggregate demand. This is because changes in aggregate demand affect the level of production in the economy, as businesses will increase or decrease production in response to changes in demand. Changes in the price level, interest rates, and wage rates may also affect aggregate demand and therefore output, but they are not the primary source of changes.

Question 9

Which of the following would most likely cause an increase in aggregate demand?
A)an increase in the corporate income tax
B)an increase in interest rates
C)an increase in the budget deficit
D)an increase in personal income tax rates

Accepted Answer

An increase in the budget deficit means that the government is spending more than it is receiving in revenues. This can lead to an increase in government spending, which increases aggregate demand.

Question 10

Which of the following is the best example of an automatic stabilizer?
A)a balanced federal budget
B)the minimum wage
C)unemployment compensation program
D)discretionary fiscal policy

Accepted Answer

An automatic stabilizer is a feature of the economy that helps to reduce fluctuations in economic activity without direct intervention by policymakers. Unemployment compensation is an automatic stabilizer because it provides a safety net for workers who lose their jobs during a slowdown, which helps support their spending and prevent further declines in economic activity. A balanced federal budget and discretionary fiscal policy, on the other hand, involve deliberate actions by policymakers and are not automatic stabilizers. The minimum wage may indirectly affect economic activity, but it is not an automatic stabilizer in the same way that unemployment compensation is.

Question 11

If fiscal policy is going to exert a stabilizing impact on the economy, it must be
A)instituted by the Federal Reserve system.
B)expansionary during an economic boom but restrictive during a recession.
C)timed correctly.
D)passed by a three-fifths majority in Congress.

Accepted Answer

Fiscal policy must be timed correctly in order to have a stabilizing impact on the economy. If implemented too early or too late, it can actually exacerbate economic fluctuations. The other choices are incorrect: A is incorrect because fiscal policy is the responsibility of the government, not the Federal Reserve system; B is incorrect because fiscal policy should be expansionary during a recession and restrictive during an economic boom; D is incorrect because a three-fifths majority is not required for the passage of fiscal policy.

Question 12

What happens in the economy illustrated in Figure 11-4 if government purchases increase by the amount necessary to achieve full employment?
A)The AD curve shifts to the right, the SRAS curve shifts to the left, and long-run equilibrium is achieved.
B)The AD curve shifts to the right, the price level increases, and long-run equilibrium is achieved.
C)The AD curve shifts to the right, the price level increases, and unemployment increases.
D)The AD curve shifts to the left, the price level increases, and employment decreases.
E)The SRAS curve shifts to the left, the price level decreases, and long-run equilibrium is achieved.

Accepted Answer

When government purchases increase, the aggregate demand (AD) curve shifts to the right, leading to a higher price level and achieving long-run equilibrium at full employment.

Question 13

According to the Keynesian view, an unanticipated reduction in spending will
A)increase the demand for goods and services.
B)raise business inventories and lead to a decline in output.
C)lead to lower interest rates, which will stimulate aggregate demand and keep the economy at full employment.
D)lead to a lower price level, which will quickly guide the economy to full-employment equilibrium.

Accepted Answer

According to the Keynesian view, a reduction in spending will lead to a decrease in aggregate demand, which will cause businesses to have more inventories than they anticipated. This, in turn, will cause businesses to reduce production to prevent overstocking, which will lower output. Therefore, the best choice is B.

Question 14

Use the figure below to answer the following question(s).
Figure 11-1 
-Refer to Figure 11-2. Which of the following will a Keynesian most likely favor if the economy is operating at point a?
A)a tax cut
B)an increase in government expenditures
C)restrictive fiscal policy
D)an increase in the budget deficit

Accepted Answer

The answer of Use the figure below to answer the...

Question 15

When the spending of consumers, businesses, government, and foreigners (net exports) is less than the current level of output, Keynesian analysis indicates that
A)the economy's output will fall short of its potential.
B)prices will rise.
C)equilibrium real GDP will increase.
D)inventories will decline.

Accepted Answer

According to Keynesian analysis, when aggregate demand is insufficient to purchase the current level of output, there will be a gap between actual output and potential output, leading the economy to operate below its full capacity. In other words, the economy's output will fall short of its potential.

Question 16

The marginal propensity to consume (MPC) is
A)consumption expenditures divided by saving.
B)consumption expenditures divided by disposable income.
C)consumption expenditures divided by personal income.
D)additional consumption expenditures divided by additional disposable income.

Accepted Answer

The marginal propensity to consume (MPC) measures the increase in consumer spending (consumption expenditures) resulting from an increase in disposable income. Therefore, the correct formula for calculating MPC is the additional consumption expenditures divided by the additional disposable income. Choice (D) is the only option that correctly reflects this definition.

Question 17

Government programs that automatically shift the government budget toward a deficit during recessions and a surplus during recoveries are called
A)discretionary fiscal policy.
B)automatic stabilizers.
C)progressive taxation.
D)price deflators.

Accepted Answer

Automatic stabilizers are government programs, like unemployment insurance and welfare, that automatically shift the government budget toward a deficit during recessions (due to increased spending) and a surplus during recoveries (due to decreased spending). This helps stabilize the economy without requiring discretionary fiscal policy actions.

Question 18

Use the figure below to answer the following question(s).
Figure 11-3 
-Refer to Figure 11-3. When the economy is operating at point a, which of the following will be most likely to happen?
A)an increase in resource prices
B)a decrease in resource prices
C)the current output will be sustained in the future
D)an increase in aggregate demand

Accepted Answer

An increase in resource prices will lead to a decrease in aggregate supply, which will shift the aggregate supply curve to the left. This will cause the equilibrium to move from point a to a point with a lower output and a higher price level.

Question 19

In the Keynesian aggregate expenditure model, the equilibrium level of income is achieved when
A)actual saving equals actual investment.
B)planned aggregate expenditures equal total output.
C)consumption equals income times the marginal propensity to consume.
D)the marginal propensity to consume equals planned output.

Accepted Answer

The equilibrium level of income is achieved when planned aggregate expenditures (which include consumption, investment, and government spending) are equal to total output. This is because any difference between planned aggregate expenditures and total output results in either unplanned inventory accumulation or depletion, which induces firms to adjust their production levels until these two measures are equal. Therefore, option B is the correct choice. Options A, C, and D are incorrect because they do not capture the essence of the equilibrium condition in the Keynesian model. While actual saving and investment may be equal at some level of income, this does not necessarily imply that the economy is in equilibrium. Similarly, consumption and income are related through the marginal propensity to consume, but this does not provide a sufficient condition for equilibrium in the presence of other factors that affect aggregate expenditures. Finally, the marginal propensity to consume is a parameter that influences planned aggregate expenditures but does not determine them, so it cannot be equated to planned output (which is a function of many factors, including investment, government spending, and exports).

Question 20

The major advantage of automatic stabilizers is that they
A)guarantee the federal budget will be balanced in a relatively short amount of time.
B)institute countercyclical fiscal policy without the delays associated with legislative action.
C)automatically produce surpluses during recessions and deficits during expansions.
D)require discretionary actions on the part of Congress before they exert an impact on output and employment.

Accepted Answer

Automatic stabilizers, such as unemployment insurance and progressive income taxes, automatically adjust government spending and revenue in response to changes in economic conditions, without the need for legislative action. This allows for countercyclical fiscal policy to be implemented quickly and efficiently, without delays caused by the political process.

Quiz 11: Fiscal Policy: the Keynesian View and the Historical Development of Macroeconomics

The consumption function shows the relationship between

Use the figure below to answer the following question(s) . Figure 11-1 -Refer to Figure 11-1. Consider the short-run aggregate supply curve SRAS. What is the segment between a and b called?

Keynesian analysis implies that potential output and price stability can be achieved if

Use the figure below to answer the following question(s) . Figure 11-3 -Refer to Figure 11-3. If the economy is currently operating at point a, which of the following would a Keynesian economist be most likely to favor?

Figure 11-4 -According to Keynesian analysis, which of the following policy combinations would most likely to move the economy illustrated in Figure 11-4 to full employment?

Because of automatic stabilizers, government budget deficits are

Long lags make discretionary policy less effective because

Which of the following is the primary source of changes in output within the framework of Keynesian analysis?

Which of the following would most likely cause an increase in aggregate demand?

Which of the following is the best example of an automatic stabilizer?

If fiscal policy is going to exert a stabilizing impact on the economy, it must be

What happens in the economy illustrated in Figure 11-4 if government purchases increase by the amount necessary to achieve full employment?

According to the Keynesian view, an unanticipated reduction in spending will

Use the figure below to answer the following question(s) . Figure 11-1 -Refer to Figure 11-2. Which of the following will a Keynesian most likely favor if the economy is operating at point a?

When the spending of consumers, businesses, government, and foreigners (net exports) is less than the current level of output, Keynesian analysis indicates that

The marginal propensity to consume (MPC) is

Government programs that automatically shift the government budget toward a deficit during recessions and a surplus during recoveries are called

Use the figure below to answer the following question(s) . Figure 11-3 -Refer to Figure 11-3. When the economy is operating at point a, which of the following will be most likely to happen?

In the Keynesian aggregate expenditure model, the equilibrium level of income is achieved when

The major advantage of automatic stabilizers is that they