Question 1

How did John Maynard Keynes explain the Great Depression, and what did he suggest?

Accepted Answer

John Maynard Keynes argued that in situations like the Great Depression, relying on the market to self-correct would not be sufficient. He believed that active government intervention, through fiscal policies such as increased public spending and lower taxes, was necessary to stimulate demand and pull the economy out of a downturn. This approach marked a departure from the classical economic thought that markets would naturally adjust back to equilibrium.

Question 2

The three reasons that the economy-wide price level and the level of real GDP move in opposite directions are

Accepted Answer

The correct reasons are the Pigou effect, Keynes's interest rate effect, and the foreign trade effect. The Pigou effect describes how deflation increases the real value of money, encouraging consumption. Keynes's interest rate effect explains how lower prices decrease the demand for money, lowering interest rates and stimulating investment. The foreign trade effect notes that lower domestic prices increase exports and reduce imports, boosting domestic production.

Question 3

Which of these statements best explains the Great Depression according to Karl Marx?

Accepted Answer

Karl Marx's theories focus on the conflict between the working class and the owners of the means of production. He believed that the replacement of human labor by machines would exacerbate this conflict, leading to a decrease in consumption by unemployed workers, further unemployment, and eventually the end of capitalism as workers took over the means of production. This explanation aligns with Marx's broader critique of capitalist systems and his anticipation of a proletarian revolution.

Question 4

It is found that when the disposable income of Elvania increases by $100 billion, household consumption spending increases by $70 billion. In Elvania, the marginal propensity to consume is

Accepted Answer

The marginal propensity to consume (MPC) is calculated by dividing the change in consumption by the change in disposable income. Here, a $70 billion increase in consumption divided by a $100 billion increase in disposable income gives an MPC of 0.7.

Question 5

Aggregate demand is equal to

Accepted Answer

Aggregate demand is the total demand for all goods and services in an economy, and it is represented by the formula C + I + G + (X - M), where C is consumption, I is investment, G is government spending, X is exports, and M is imports. The (X - M) term represents net exports, which is the difference between a country's exports and imports.

Question 6

Originally, Keynes conceived of the aggregate supply curve as consisting of two distinct segments. In this conception, below the full-employment level of output the aggregate supply curve is __________, and once the economy reaches the full-employment level of output it becomes __________.

Accepted Answer

Keynes originally conceived the aggregate supply curve as being horizontal below the full-employment level of output, indicating that firms would be willing to supply any amount of goods at the prevailing price level. Once the economy reaches the full-employment level of output, the curve becomes vertical, indicating that no additional output can be produced regardless of increases in the price level.

Question 7

At the time of the Great Depression, the __________ believed that the economic disruptions being experienced were temporary and that market forces would eventually reestablish prosperity.

Accepted Answer

Classical economists held the belief that markets are self-correcting and that, given time, economic imbalances would resolve themselves without the need for government intervention. This view contrasts with Keynesian economists, who advocate for active government intervention in the economy during downturns.

Question 8

Consider the figure below . Which of the following would cause a shift in the aggregate demand curve from AD ₁ to AD ₂ ?

Accepted Answer

The answer of Consider the figure below . Which of...

Question 9

The relationship between the economy-wide price level and the level of real GDP illustrated by the aggregate demand curve is

Accepted Answer

The aggregate demand curve shows an inverse relationship between the economy-wide price level and the level of real GDP, meaning as the price level increases, the quantity of goods and services demanded decreases, and vice versa.

Question 10

Economic theorists expanded on the Keynesian aggregate supply model in the late 1940s, broadening it into a three-part aggregate supply curve. Which of the following best describes that three-part supply curve?

Accepted Answer

The correct description of the three-part aggregate supply curve includes a flat initial segment, indicating that output can increase without a rise in price levels when there is slack in the economy. The middle segment slopes upward, showing that as the economy approaches full employment, prices begin to increase with output. The final vertical segment at full-employment GDP represents a point where output cannot increase further regardless of price level increases, indicating the economy's capacity limit.

Question 11

In the country of Trivia, it is widely believed that the marginal propensity to consume is 0.75. This means that a onetime increase in spending of $50 billion will result in an increase in GDP equal to

Accepted Answer

The marginal propensity to consume (MPC) is 0.75, meaning for every additional dollar received, 75 cents will be spent. The multiplier effect is calculated as 1/(1-MPC), which is 1/(1-0.75) = 4. Therefore, a one-time increase in spending of $50 billion will result in an increase in GDP of 4 times $50 billion, which equals $200 billion.

Question 12

Using a two-part aggregate supply curve, an increase in aggregate demand when the economy is at less than full employment would be expected to lead to __________ in real GDP and __________ in the price level.

Accepted Answer

The answer of Using a two-part aggregate supply curve, an...

Question 13

According to Keynes, when the price level rises, it causes the interest rate to do what? It causes the level of business spending to do what?

Accepted Answer

Keynesian economics suggests that a rise in the price level leads to an increase in the demand for money as consumers need more money to handle their transactions. This increased demand for money can lead to higher interest rates as the supply of money is relatively fixed in the short term. Higher interest rates, in turn, make borrowing more expensive, which can lead to a decrease in business investment and spending.

Question 14

Consider the figure below. Which of the following will cause a shift in aggregate demand from AD₂ to AD₁?

Accepted Answer

The answer of Consider the figure below. Which of the...

Question 15

The Keynesian aggregate supply model does not take into account what aspect of human behavior that is factored into later assumptions?

Accepted Answer

The Keynesian aggregate supply model primarily focuses on the short term and assumes that people do not anticipate future events or changes in policy when making economic decisions. Later models, such as the New Keynesian and Rational Expectations models, incorporate the idea that people anticipate the future and adjust their behavior accordingly.

Question 16

In which of the following situations did the three-part aggregate supply model not perform well?

Accepted Answer

The three-part aggregate supply model struggled to explain the phenomenon of stagflation in the late 1960s and early 1970s, which was characterized by high inflation and high unemployment occurring simultaneously, challenging traditional economic theories that suggested a trade-off between inflation and unemployment.

Question 17

Keynes suggested that what kind of spending would be necessary to move the economy out of the Depression?

Accepted Answer

Keynes advocated for government intervention in the economy, particularly through increased government spending, as a means to stimulate demand and pull the economy out of a depression. This approach is a central tenet of Keynesian economics.

Question 18

The Pigou effect is one of the reasons that the aggregate demand curve slopes downward. According to this argument, when the price level

Accepted Answer

The Pigou effect suggests that when the price level decreases, the real value of money increases, allowing people's savings to buy more goods and services, which in turn increases the total level of spending.

Question 19

Consider the figure below . Which of the following will cause a shift in the aggregate demand curve from AD ₁ to AD ₂ ?

Accepted Answer

The answer of Consider the figure below . Which of...

Question 20

Which of these would cause a decrease in aggregate demand?

Accepted Answer

An increase in imports means that a country is buying more goods and services from abroad than it is selling. This can lead to a decrease in domestic production and, consequently, a decrease in aggregate demand, as money flows out of the country to pay for these imports rather than being spent on domestically produced goods and services.

Quiz 6: Aggregate Supply Aggregate Demand

How did John Maynard Keynes explain the Great Depression, and what did he suggest?

The three reasons that the economy-wide price level and the level of real GDP move in opposite directions are

Which of these statements best explains the Great Depression according to Karl Marx?

It is found that when the disposable income of Elvania increases by $100 billion, household consumption spending increases by $70 billion. In Elvania, the marginal propensity to consume is

Aggregate demand is equal to

Originally, Keynes conceived of the aggregate supply curve as consisting of two distinct segments. In this conception, below the full-employment level of output the aggregate supply curve is , and once the economy reaches the full-employment level of output it becomes .

At the time of the Great Depression, the __________ believed that the economic disruptions being experienced were temporary and that market forces would eventually reestablish prosperity.

Consider the figure below . Which of the following would cause a shift in the aggregate demand curve from AD ₁ to AD ₂ ?

The relationship between the economy-wide price level and the level of real GDP illustrated by the aggregate demand curve is

Economic theorists expanded on the Keynesian aggregate supply model in the late 1940s, broadening it into a three-part aggregate supply curve. Which of the following best describes that three-part supply curve?

In the country of Trivia, it is widely believed that the marginal propensity to consume is 0.75. This means that a onetime increase in spending of $50 billion will result in an increase in GDP equal to

Using a two-part aggregate supply curve, an increase in aggregate demand when the economy is at less than full employment would be expected to lead to in real GDP and in the price level.

According to Keynes, when the price level rises, it causes the interest rate to do what? It causes the level of business spending to do what?

Consider the figure below. Which of the following will cause a shift in aggregate demand from AD₂ to AD₁?

The Keynesian aggregate supply model does not take into account what aspect of human behavior that is factored into later assumptions?

In which of the following situations did the three-part aggregate supply model not perform well?

Keynes suggested that what kind of spending would be necessary to move the economy out of the Depression?

The Pigou effect is one of the reasons that the aggregate demand curve slopes downward. According to this argument, when the price level

Consider the figure below . Which of the following will cause a shift in the aggregate demand curve from AD ₁ to AD ₂ ?

Which of these would cause a decrease in aggregate demand?

Quiz 6: Aggregate Supply Aggregate Demand

How did John Maynard Keynes explain the Great Depression, and what did he suggest?

The three reasons that the economy-wide price level and the level of real GDP move in opposite directions are

Which of these statements best explains the Great Depression according to Karl Marx?

It is found that when the disposable income of Elvania increases by $100 billion, household consumption spending increases by $70 billion. In Elvania, the marginal propensity to consume is

Aggregate demand is equal to

Originally, Keynes conceived of the aggregate supply curve as consisting of two distinct segments. In this conception, below the full-employment level of output the aggregate supply curve is __________, and once the economy reaches the full-employment level of output it becomes __________.

At the time of the Great Depression, the __________ believed that the economic disruptions being experienced were temporary and that market forces would eventually reestablish prosperity.

Consider the figure below . Which of the following would cause a shift in the aggregate demand curve from AD 1 to AD 2 ?

The relationship between the economy-wide price level and the level of real GDP illustrated by the aggregate demand curve is

Economic theorists expanded on the Keynesian aggregate supply model in the late 1940s, broadening it into a three-part aggregate supply curve. Which of the following best describes that three-part supply curve?

In the country of Trivia, it is widely believed that the marginal propensity to consume is 0.75. This means that a onetime increase in spending of $50 billion will result in an increase in GDP equal to

Using a two-part aggregate supply curve, an increase in aggregate demand when the economy is at less than full employment would be expected to lead to __________ in real GDP and __________ in the price level.

According to Keynes, when the price level rises, it causes the interest rate to do what? It causes the level of business spending to do what?

Consider the figure below. Which of the following will cause a shift in aggregate demand from AD2 to AD1?

The Keynesian aggregate supply model does not take into account what aspect of human behavior that is factored into later assumptions?

In which of the following situations did the three-part aggregate supply model not perform well?

Keynes suggested that what kind of spending would be necessary to move the economy out of the Depression?

The Pigou effect is one of the reasons that the aggregate demand curve slopes downward. According to this argument, when the price level

Consider the figure below . Which of the following will cause a shift in the aggregate demand curve from AD 1 to AD 2 ?

Which of these would cause a decrease in aggregate demand?

Originally, Keynes conceived of the aggregate supply curve as consisting of two distinct segments. In this conception, below the full-employment level of output the aggregate supply curve is , and once the economy reaches the full-employment level of output it becomes .

Consider the figure below . Which of the following would cause a shift in the aggregate demand curve from AD ₁ to AD ₂ ?

Using a two-part aggregate supply curve, an increase in aggregate demand when the economy is at less than full employment would be expected to lead to in real GDP and in the price level.

Consider the figure below. Which of the following will cause a shift in aggregate demand from AD₂ to AD₁?

Consider the figure below . Which of the following will cause a shift in the aggregate demand curve from AD ₁ to AD ₂ ?