Question 1

The part of consumption that is dependent on disposable income is called autonomous consumption.

Accepted Answer

The part of consumption that is dependent on disposable income is called induced consumption, while autonomous consumption refers to the part of consumption not influenced by changes in disposable income (i.e. the basic necessities of life).

Question 2

The economy can be in equilibrium and in a recessionary gap simultaneously.

Accepted Answer

This is possible in an economy where the level of aggregate demand is below the level of potential output or full employment. In such a situation, the economy is in a recessionary gap, but it can also be in equilibrium as long as the level of aggregate demand is equal to the level of aggregate supply at that lower level of output.

Question 3

Efficiency wage models imply that workers are more productive when they are paid a higher wage, as compared to when they are paid a lower wage.

Accepted Answer

Efficiency wage models propose that when workers are paid a higher wage, they have a greater incentive to work harder and be more productive. This is because higher wages offer monetary rewards for good performance and the fear of losing a well-paying job can motivate workers to strive for better results. Therefore, efficiency wage models imply that higher wages can lead to more productive workers.

Question 4

An increase in autonomous consumption, an increase in disposable income, or a decrease in the marginal propensity to consume can all increase consumption.

Accepted Answer

An increase in autonomous consumption or an increase in disposable income can increase consumption, but a decrease in the marginal propensity to consume would actually decrease the additional consumption out of additional income, not increase total consumption.

Question 5

In reality, idle resources must exist in the economy in order for the multiplier process to lead to an increase in Real GDP.

Accepted Answer

The multiplier process relies on the presence of idle resources (such as unemployed labor or unused capital) so that increased spending can lead to an increase in production and thus Real GDP, without immediately causing inflation.

Question 6

The work of John Maynard Keynes led to a major revolution in economic thought.

Accepted Answer

Keynesian economics challenged classical economic theory and influenced government policies and interventions in the economy, leading to a significant shift in economic thinking.

Question 7

When total expenditure (TE) exceeds total production (TP), inventory levels rise unexpectedly, which sends a signal to firms that they have overproduced, so they cut back on production.

Accepted Answer

This statement is true. When inventory levels rise unexpectedly, it is a signal to firms that they have overproduced and should cut back on production to bring TE and TP into balance.

Question 8

In the simple Keynesian model, the aggregate supply curve has a horizontal segment at levels of output below the level of natural Real GDP and a vertical segment at the level of natural Real GDP.

Accepted Answer

This is because the simple Keynesian model assumes that there are idle resources in the economy, so when demand increases, output can increase without affecting prices (horizontal segment). However, at the level of natural Real GDP, all resources are fully employed, so any increase in demand will lead to an increase in prices without a corresponding increase in output (vertical segment).

Question 9

Many economists argue that the labor market may take a long time for wages to adjust to new equilibrium level.

Accepted Answer

This is because wages are often "sticky" and do not immediately adjust to changes in labor supply and demand. This can result in unemployment or underemployment in the short run.

Question 10

Classical economists used efficiency wage models to support their belief in a self-regulating economy.

Accepted Answer

Classical economists did not use efficiency wage models; these models were developed much later to explain why wages might not fall to clear labor markets, which is contrary to the classical view of a self-regulating economy.

Question 11

The marginal propensity to save (MPS) can be found using the equation: (1 - MPC).

Accepted Answer

The marginal propensity to save (MPS) is indeed calculated as (1 - MPC), where MPC stands for the marginal propensity to consume. This equation reflects the idea that any additional income will be either saved or spent, so the portion not consumed (MPC) is saved (MPS).

Question 12

Keynes asserted that the interest rate is important in determining investment, but not as important as other variables.

Accepted Answer

Keynes believed that investment was determined by a variety of factors, including the state of market expectations, uncertainty, liquidity preferences, and the weighted average cost of capital, among others. While the interest rate played a role in investment decisions, it was not the most important factor.

Question 13

A simple Keynesian model is representative of a closed economy, with no foreign sector.

Accepted Answer

A simple Keynesian model is typically used to analyze a closed economy, without any consideration of foreign trade or investment.

Question 14

Classical economists and Keynes shared the belief that increased saving would necessarily stimulate an equal amount of increased investment spending.

Accepted Answer

While classical economists believed that increased saving would lead to increased investment, Keynes argued that this was not necessarily the case in times of economic depression, when demand and consumer spending were low. Instead, he argued that government intervention and increased public spending were necessary to stimulate economic growth.

Question 15

A consumption function is a statement that shows the relationship between interest rates and consumption.

Accepted Answer

A consumption function shows the relationship between income and consumption, not interest rates and consumption.

Question 16

According to Keynes, the economy is inherently unstable and may get stuck in a recessionary gap.

Accepted Answer

According to Keynes, the economy is subject to instability due to fluctuations in aggregate demand, and may get stuck in a recessionary gap where there is insufficient demand to maintain full employment.

Question 17

The marginal propensity to consume (MPC) refers to the proportion of disposable income that is spent on consumption.

Accepted Answer

The answer of The marginal propensity to consume (MPC) refers...

Question 18

In a simple Keynesian model, the aggregate supply curve is upward sloping.

Accepted Answer

In a simple Keynesian model, the aggregate supply curve is typically represented as perfectly elastic (horizontal) at a certain level of output, reflecting the idea that firms will produce any amount of goods at a given price level when there are unemployed resources.

Question 19

In Keynes' view, labor unions would resist wage cuts, but individual employees would go along with wage cuts initiated by his/her employer.

Accepted Answer

In Keynes' view, individual employees would resist wage cuts just as much as labor unions. He believed that wage cuts would lead to a decrease in demand, worsening the overall economic situation. Therefore, he advocated for government intervention to stimulate demand and stabilize employment.

Question 20

A change in autonomous spending leads to an even greater change in total spending through the multiplier process.

Accepted Answer

The multiplier effect shows that an initial change in autonomous spending leads to a larger change in total spending through a chain reaction of increased income, expenditure, and further income generation. As a result, the initial change in autonomous spending is magnified by the multiplier effect, resulting in an even greater change in total spending.

Quiz 10: Keynesian Macroeconomics and Economic Instability a Critique of the Self Regulating Economy