Question 1

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 that automatically shift the government budget toward a deficit during recessions and a surplus during recoveries. These programs include unemployment insurance, progressive taxation, and welfare programs. They help to stabilize the economy by providing a cushion for those who have lost their jobs or are experiencing economic hardship, which in turn helps to maintain consumer spending and demand in the economy.

Question 2

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

At point a, the economy is producing at full employment and at its potential output. As a result, any increase in aggregate demand will lead to a shortage of resources, causing an increase in resource prices.

Question 3

Which of the following would a Keynesian economist be most likely to stress?
A) Supply creates its own demand.
B) Businesses will not produce goods and services if they do not think people will buy them.
C) You cannot spend your way out of a recession.
D) When the unemployment rate is high, wage rates will fall.
E) A dollar saved is a dollar earned; a high rate of saving is the key to prosperity.

Accepted Answer

Keynesian economics emphasizes the importance of stimulating demand through government intervention, as opposed to laissez-faire policies that rely on supply-side factors such as tax cuts to boost the economy. Therefore, option B, which emphasizes the importance of businesses anticipating consumer demand to drive production, is more consistent with Keynesian economics. The other options do not align with Keynesian economic principles.

Question 4

According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?
A) a reduction in government expenditures and/or an increase in taxes
B) an increase in government expenditures and/or a reduction in taxes
C) make no policy changes because market forces will assure the maintenance of full employment.
D) maintain a balanced budget

Accepted Answer

According to Keynesian economics, during a recession, aggregate demand falls below the level needed to maintain full employment. To bring the economy back to full employment, policy makers should use expansionary fiscal policy by either increasing government spending or reducing taxes, or a combination of both. This will increase aggregate demand and stimulate economic growth. Option A is contractionary fiscal policy and will only exacerbate the recession. Option C is incorrect as Keynesians believe in the use of active government intervention to stabilize the economy. Option D is also incorrect as maintaining a balanced budget during a recession can be detrimental to economic growth.

Question 5

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 significant increase in the price level.

Question 6

Keynesian analysis stresses that a tax cut that increases the government's budget deficit (or reduces its budget surplus)
A) is appropriate during a period of inflation.
B) will increase the money supply.
C) will stimulate aggregate supply and, thereby, promote employment.
D) will stimulate aggregate demand and, thereby, promote employment.

Accepted Answer

According to Keynesian analysis, a tax cut that increases the government's budget deficit (or reduces its budget surplus) will stimulate aggregate demand by increasing disposable income, which in turn will promote employment. This is because increased consumption spending by households and businesses will create a multiplier effect, leading to increased output and employment.

Question 7

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 8

Figure 11-4  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

The answer of Figure 11-4  What happens in the...

Question 9

Use the figure below to answer the following question(s). Figure 11-2
 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 10

Use the figure below to answer the following question(s). Figure 11-2
 Refer to Figure 11-2. When the economy is operating at point a, reliance on the self-correcting mechanism will
A) result in higher resource prices and a shift to the left in the SRAS curve.
B) result in lower resource prices and a shift to the right in the SRAS curve.
C) lead to lower interest rates and a shift to the right in the AD curve.
D) lead to higher interest rates and a shift to the left in the AD curve.
E) do both a and d.

Accepted Answer

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

Question 11

If an economy were experiencing a high rate of unemployment as the result of weak aggregate demand, a Keynesian economist would be most likely to recommend
A) a reduction in taxes coupled with a reduction in government expenditures of equal size.
B) an increase in government expenditures coupled with an increase in taxes of equal size.
C) a reduction in taxes, without any offsetting reduction in government expenditures.
D) maintenance of a balanced budget.

Accepted Answer

A Keynesian economist would recommend a reduction in taxes without reducing government expenditures to stimulate aggregate demand and reduce unemployment.

Question 12

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 spending is less than the current level of output, it means there is a deficiency in aggregate demand, leading to a shortfall in output. As a result, the economy's output will fall short of its potential.

Question 13

If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to
A) counteract the recession.
B) prolong the recession and increase its severity.
C) end the recession sooner.
D) increase the level of real GDP.

Accepted Answer

According to Keynesian theory, during a recession, government spending should increase, and taxes should decrease to stimulate demand and promote economic growth. By raising taxes during a recession, the government is reducing disposable income and decreasing consumption, which can lead to a further decline in business activity and higher unemployment rates. Therefore, raising taxes during a recession can actually prolong the recession and increase its severity.

Question 14

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 to stabilize the economy, as it needs to be expansionary during a recession and restrictive during a boom to counteract economic fluctuations.

Question 15

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

Unemployment compensation program is the best example of an automatic stabilizer because it automatically increases during a recession when more people are unemployed and decreases during economic expansion. This helps to stabilize the economy by providing income to those who have lost their jobs and increasing consumer spending. A balanced federal budget and discretionary fiscal policy are not automatic stabilizers as they require conscious decision-making by policymakers. The minimum wage can have an impact on the economy, but it is not an automatic stabilizer.

Question 16

Rather than seeking to balance the budget, Keynesian economists argue that the government's tax and spending policies should be determined by the
A) demand for government-provided public goods.
B) level of aggregate demand required to achieve full employment of resources.
C) size and quality of the labor force.
D) need to expand or contract the supply of money.

Accepted Answer

Keynesian economists argue that government tax and spending policies should be determined by the level of aggregate demand required to achieve full employment of resources. They believe that during times of recession or when unemployment is high, the government should increase spending and cut taxes to stimulate demand and boost economic activity. Conversely, during times of high inflation or when the economy is overheating, they advocate for cutting spending and raising taxes to cool down the economy. Balancing the budget is not the primary goal of Keynesian economic policies.

Question 17

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

In the framework of Keynesian analysis, changes in output are primarily determined by changes in aggregate demand. Specifically, when aggregate demand increases, output increases and when aggregate demand decreases, output decreases. This is because Keynesian theory emphasizes the importance of consumer and business spending in driving economic activity. Changes in the price level, interest rates, and wage rates may also impact output, but their effects are typically viewed as secondary to changes in aggregate demand.

Question 18

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 can stimulate aggregate demand by increasing government spending on goods and services, which in turn, can increase demand for goods and services produced by the private sector.

Question 19

Use the figure below to answer the following question(s). Figure 11-2
 Refer to Figure 11-2. If an economy operates in the short run at point a, Keynesian analysis indicates that restrictive fiscal policy will
A) increase AD and move the economy toward point c.
B) decrease AD and move the economy toward point b.
C) increase SRAS and move the economy toward point b.
D) decrease SRAS and move the economy toward point c.

Accepted Answer

At point a, the economy is in a recessionary gap with output below potential output (Y1 < Yp). Restrictive fiscal policy, such as a decrease in government spending or an increase in taxes, would decrease AD (aggregate demand) and shift the AD curve leftward. This would lead to a further decrease in output and a move toward point b.

Question 20

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

According to Keynesian analysis, the economy illustrated in the figure is in a recessionary gap, which means it is producing below its potential output level. To move the economy to full employment, the government needs to increase aggregate demand. Option C, which suggests an increase in government purchases and a reduction in taxes, would boost aggregate demand through an increase in government spending and disposable income, leading to increased consumption and investment. Options A and D suggest an increase in taxes, which would decrease disposable income, leading to a decrease in consumption and investment, which would result in a further fall in output levels. Option B suggests a reduction in government purchases, which would decrease aggregate demand.

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

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?

Which of the following would a Keynesian economist be most likely to stress?

According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?

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 stresses that a tax cut that increases the government's budget deficit (or reduces its budget surplus)

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

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

Use the figure below to answer the following question(s) . Figure 11-2 Refer to Figure 11-2. When the economy is operating at point a, reliance on the self-correcting mechanism will

If an economy were experiencing a high rate of unemployment as the result of weak aggregate demand, a Keynesian economist would be most likely to recommend

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

If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to

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

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

Rather than seeking to balance the budget, Keynesian economists argue that the government's tax and spending policies should be determined by the

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?

Use the figure below to answer the following question(s) . Figure 11-2 Refer to Figure 11-2. If an economy operates in the short run at point a, Keynesian analysis indicates that restrictive fiscal policy will

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?