Question 1

When consumption and investment is reduced because of the higher interest rates induced by the government expansionary fiscal policy, the effect is called
A) the crowding-in effect.
B) the crowding-out effect.
C) the multiplier effect.
D) the budget effect.

Accepted Answer

When government expansionary fiscal policy leads to higher interest rates, it reduces consumption and investment. This happens because higher interest rates increase the cost of borrowing for consumers and businesses, leading to a decrease in spending. This decrease in spending is called the crowding-out effect.

Question 2

Unanticipated increase in the government expenditures would
A) shift the LM curve to the right, and the AD curve up and to the right.
B) shift the IS curve to the right, and the AD curve up and to the right.
C) shift the IS curve to the left, and the AD curve up and to the right.
D) shift the IS curve to the right, and the AD curve down and to the left.

Accepted Answer

An unanticipated increase in government expenditures would increase the level of autonomous spending in the economy, shifting the IS curve to the right. This would result in an increase in output and income, leading to an increase in aggregate demand (AD) and shifting the AD curve up and to the right.

Question 3

Anticipated changes in the aggregate demand, in the Keynesian model,
A) would affect the output in the short run.
B) would affect the output in the long run.
C) would not affect the output in the short and long runs.
D) would affect the output in the case of the money supply changes.

Accepted Answer

C

Question 4

According to Keynesian theory, SRAS curve is positively sloped, because
A) employers and employees fail to predict prices correctly.
B) employers and employees have misperception about the change in relative price level.
C) labour contracts are signed for a period in which labour market conditions are not known.
D) wages are flexible, but prices are not.

Accepted Answer

Keynesian theory states that wages are sticky or delayed in adjusting to changes in the general price level. This means that if there is an increase in demand for labor, it will initially translate into higher employment instead of higher wages, and vice versa. These labor market conditions are not known in advance, as labor contracts are usually signed for a period of time. As a result, the SRAS curve is positively sloped, because employers and employees adjust their output in response to unexpected changes in the price level.

Question 5

The main difference between classical economists and the Keynesians in explaining the SRAS curve is that
A) classicals argue that prices are rigid, but Keynesians argue that wages are rigid.
B) classicals argue that wages are rigid, but Keynesians argue that prices are rigid.
C) classicals argue that output changes with price changes as long as there is misperception about relative price levels, but Keynesians argue that SRAS is positively sloped for the term of the labour contracts.
D) classicals argue that SRAS is positively sloped because of rational expectations, but Keynesians argue that it is because of the failure of rational expectations.

Accepted Answer

Classical economists believe that output changes with price changes due to misperceptions about relative price levels, while Keynesians argue that the SRAS curve is positively sloped due to wage and price rigidities during the term of labor contracts.

Question 6

The Keynesian theory of nominal wage rigidity predicts that
A) the real wage is countercyclical.
B) the real wage is procyclical.
C) the real wage is acyclical.
D) the real wage is constant.

Accepted Answer

The Keynesian theory of nominal wage rigidity predicts that during a recession, firms may not be able to cut nominal wages as easily as they can in a boom period. This leads to a situation where the real wage (nominal wage divided by the price level) is countercyclical, meaning it goes up during a recession and down during a boom.

Question 7

In the Keynesian model, the economy can be off the FE line and the LRAS in the short run, because
A) the interest rate is slow to adjust.
B) the unemployment rate is high during recession.
C) the actual price level differs from what was expected when nominal wage contracts were signed.
D) real wage is sticky in short run.

Accepted Answer

In the Keynesian model, the economy can deviate from full employment and long-run aggregate supply in the short run because the actual price level may differ from what was expected when nominal wage contracts were signed, leading to short-run fluctuations in output and employment.

Question 8

The crowing-out effect occurs because of
A) higher prices induced by the expansionary fiscal policy.
B) higher interest rates induced by the expansionary fiscal policy.
C) higher inflation induced by the expansionary fiscal policy.
D) higher output induced by the expansionary fiscal policy.

Accepted Answer

The crowding-out effect occurs due to higher interest rates induced by the expansionary fiscal policy. When the government increases its spending, it borrows more money from financial markets, which in turn increases the demand for loanable funds. This increase in demand for loans leads to an increase in the interest rate, which makes it more expensive for private firms and individuals to borrow money, reducing their willingness to invest and/or consume. As a result, this reduces the effectiveness of the expansionary fiscal policy in boosting output and employment, leading to the crowding-out effect.

Question 9

Keynesians are skeptical of the classical theory that recessions are periods of increased mismatch between workers and jobs because
A) help-wanted advertising falls during recessions.
B) help-wanted advertising rises during recessions.
C) workers spend a lot of time searching for work in recessions.
D) people are indifferent between being employed or not.

Accepted Answer

Keynesians argue that during recessions, the demand for labor falls, which is reflected in decreased help-wanted advertising. This contradicts the classical theory's emphasis on mismatches in the labor market as the primary cause of recessions.

Question 10

Keynesian business cycle theory cannot account for the procyclical behaviour of
A) employment, money, inflation, and labour productivity with the labour hoarding assumption.
B) unemployment, money, inflation, and labour productivity with the labour hoarding assumption.
C) employment, money, real interest rates, and real wages with sticky wages.
D) unemployment, money, inflation, and real wages.

Accepted Answer

Keynesian theory assumes that firms will hoard labor during downturns, leading to a countercyclical behavior in employment. However, empirical evidence suggests that employment, money, inflation, and labor productivity all exhibit procyclical behavior. Keynesian theory cannot account for this with the assumption of labor hoarding.

Question 11

Which of the following statements about the behaviour of the real wages in the business cycles is true?
A) The sticky wage theory can produce procyclical real wages.
B) The sticky wage theory along with the price rigidity theory can explain the fact that the real wages are procyclical.
C) The sticky wage theory along with the price rigidity theory can explain the fact that the real wages are countercyclical.
D) The sticky wage theory can explain the fact that the real wages are acyclical.

Accepted Answer

The sticky wage theory suggests that wages are slow to adjust in response to changes in labor market conditions. The price rigidity theory suggests that prices are also slow to adjust in response to changes in market conditions. Together, these two theories can explain why real wages are procyclical, meaning they tend to rise during economic expansions and fall during economic recessions. Therefore, option B is the correct answer.

Question 12

Which one of the following describes Keynesians' rationale for the positively sloped SRAS?
A) Nominal wages are fixed for the term of labour contracts, but price level changes, leading to a change in real wages and output.
B) Demand for labour increases as prices and therefore profits increase.
C) Workers prefer longer term contracts because of job security.
D) There is misperception about the relative price levels.

Accepted Answer

Keynesians believe that nominal wages are sticky and fixed in the short run due to long-term labour contracts, leading to changes in real wages and output when there is a change in the price level. Thus, the SRAS is positively sloped.

Question 13

Which of the following is true in the Keynesian model?
A) An easy fiscal policy affects output despite the effect of fiscal policy on the interest rates.
B) An easy monetary policy is associated with an increase in interest rates.
C) An easy fiscal policy is associated with a decrease in interest rates.
D) An easy monetary policy will lead to crowding-out effect.

Accepted Answer

In the Keynesian model, an easy fiscal policy can affect output despite its impact on interest rates. This is because the model assumes that there can be instances of involuntary unemployment where additional government spending can increase demand and stimulate economic activity, even if interest rates initially rise as a result.

Question 14

Which of the following statements is false?
A) Keynesians, like classicals, believe that people's expectations are formed based on the rational expectations hypothesis.
B) Keynesians, like classicals, recognize the effect of productivity shocks on the business cycles.
C) Keynesians, like classicals, believe that the free market is able to respond quickly and efficiently to the aggregate demand shocks.
D) Keynesians, unlike classicals, believe that aggregate demand shocks are the main source of the business cycles.

Accepted Answer

Keynesians do not believe that the free market is always able to respond quickly and efficiently to aggregate demand shocks, whereas classical economists believe that the free market always leads to equilibrium.

Question 15

The crowding-out effect will probably occur, when
A) the government budget is in surplus.
B) the government follows an easy fiscal policy.
C) the government follows a tight fiscal policy.
D) the government crowds out the economy by lowering the interest rate.

Accepted Answer

The answer of The crowding-out effect will probably occur, when
A)...

Question 16

The crowding-out effect refers to a situation where
A) an easy fiscal policy reduces interest rate and increases investment.
B) an easy monetary policy reduces interest rate and increases investment.
C) an easy fiscal policy increases interest rate and decreases investment.
D) an easy monetary policy increases interest rate and decreases investment.

Accepted Answer

The crowding-out effect is observed when an easy fiscal policy, such as a government spending increase or tax cut, leads to an increase in demand for credit which eventually increases interest rates. The higher interest rates then reduce private investment, harming economic growth. Therefore, option C is the correct choice as it states that an easy fiscal policy leads to an increase in interest rates and a decrease in investment, which is the definition of the crowding-out effect.

Question 17

In the Keynesian model, wages and prices are
A) sticky in the short run, but flexible in the long run.
B) sticky in the long run, but flexible in the short run.
C) forecast accurately by both employees and employers.
D) flexible in the short run and the long run.

Accepted Answer

In the short run, wages and prices are sticky because they do not adjust immediately to changes in demand or supply. However, in the long run, they are more flexible as they can adjust to changes in the economy. This idea is the basis of the Phillips curve, which shows the inverse relationship between unemployment and inflation in the short run, but in the long run, there is no trade-off between the two.

Question 18

In the Keynesian model of the business cycles,
A) unanticipated changes in government expenditures cause output to change by change in real wage.
B) anticipated changes in government expenditures cause output to change by changes in real wage.
C) anticipated changes in money supply cause output to change by changes in real wage.
D) anticipated or unanticipated changes in money supply cause output to change by changes in real wage.

Accepted Answer

According to the Keynesian model, unanticipated changes in government expenditures cause output to change through a change in real wage. This is because changes in government expenditures can lead to changes in demand for goods and services, which can affect the level of employment and ultimately the real wage. With unanticipated changes, firms may not have enough time to adjust their prices and wages to the new level of demand, leading to temporary changes in output.

Question 19

In the Keynesian model,
A) the short-run aggregate supply slopes upward because of price misperception by firms.
B) the short-run aggregate supply slopes upward because the actual price may be different from the expected price during the term of wage contract.
C) the short-run aggregate supply is horizontal because of price misperception by firms.
D) the short-run aggregate supply is horizontal because the actual price may be different from the expected price during the term of wage contract.

Accepted Answer

In the Keynesian model, the short-run aggregate supply curve slopes upward because the actual price may be different from the expected price during the term of wage contracts. This means that in the short run, firms may not adjust their prices immediately, leading to a temporary response to changes in aggregate demand. Price misperception by firms refers to a different explanation for the upward sloping SRAS curve in the New Keynesian model, which suggests that firms make systematic errors in their price expectations.

Question 20

An unanticipated increase in the money supply would
A) shift the LM curve to the right and the AD curve up and to the right.
B) shift the LM curve to the left and the AD curve up and to the right.
C) shift the LM curve to the right and the AD curve down and to the left.
D) shift the IS curve to the right and the AD curve up and to the right.

Accepted Answer

An unanticipated increase in the money supply would shift the LM curve to the right as the lower interest rates would increase investment and thus increase real GDP, and the AD curve up and to the right as aggregate demand increases due to increased investment demand, leading to higher output and higher prices.

Quiz 12: Keynesian Business Cycle Analysis: Non-Market-Clearing Macroeconomics

When consumption and investment is reduced because of the higher interest rates induced by the government expansionary fiscal policy, the effect is called

Unanticipated increase in the government expenditures would

Anticipated changes in the aggregate demand, in the Keynesian model,

According to Keynesian theory, SRAS curve is positively sloped, because

The main difference between classical economists and the Keynesians in explaining the SRAS curve is that

The Keynesian theory of nominal wage rigidity predicts that

In the Keynesian model, the economy can be off the FE line and the LRAS in the short run, because

The crowing-out effect occurs because of

Keynesians are skeptical of the classical theory that recessions are periods of increased mismatch between workers and jobs because

Keynesian business cycle theory cannot account for the procyclical behaviour of

Which of the following statements about the behaviour of the real wages in the business cycles is true?

Which one of the following describes Keynesians' rationale for the positively sloped SRAS?

Which of the following is true in the Keynesian model?

Which of the following statements is false?

The crowding-out effect will probably occur, when

The crowding-out effect refers to a situation where

In the Keynesian model, wages and prices are

In the Keynesian model of the business cycles,

In the Keynesian model,

An unanticipated increase in the money supply would