Question 1

(a)Draw a figure,using the Keynesian IS-LM framework,of an economy in recession.
(b)Now suppose the IS curve shifts up and to the right far enough that if the real interest rate is unchanged,output will increase beyond full employment.If the Fed's goal is to move output to its full-employment level,what must happen to the real interest rate? What is the effect on the price level?
(c)Suppose,before the Fed can act,that the government announces a restrictive fiscal policy,shifting the IS curve down and to the left relative to its position in part (b)What is the Fed likely to do (relative to what it would do if fiscal policy wasn't restrictive)if its goal is to target full-employment output? What happens to the real interest rate relative to what it is in part (b)?

Accepted Answer

The answer of (a)Draw a figure,using the Keynesian IS-LM framework,of...

Question 2

According to Keynesians,the primary reason money is not neutral is

Accepted Answer

According to Keynesians, the primary reason money is not neutral is due to price stickiness. This means that changes in the money supply can have a temporary effect on output and employment, as prices do not adjust immediately to changes in demand. As a result, changes in the money supply can affect the level of economic activity.

Question 3

According to the Keynesian IS-LM model,what is the effect of each of the following on output,the real interest rate,employment,and the price level? Distinguish between the short run and the long run.
(a)Expected inflation decreases.
(b)Labor supply increases due to a change in demographics.
(c)The future marginal product of capital increases.

Accepted Answer

The answer of According to the Keynesian IS-LM model,what is...

Question 4

In the Keynesian model in the short run,a decrease in government purchases causes output to ________ and the real interest rate to ________.

Accepted Answer

In the Keynesian model, a decrease in government purchases reduces aggregate demand, leading to a decrease in output. This decrease in demand for funds also leads to a decrease in the real interest rate as there is less competition for borrowing.

Question 5

Suppose the government decided to tighten monetary policy and decrease government expenditures.In the short run in the Keynesian model,the effect of these policies would be to ________ the real interest rate and ________ the level of output.

Accepted Answer

The answer of Suppose the government decided to tighten monetary...

Question 6

Using the Keynesian model,the effect of a government-imposed ceiling on interest rates paid on personal checking accounts that is lower than the current market interest rate would be to cause ________ in the real interest rate and ________ in output in the short run.

Accepted Answer

The answer of Using the Keynesian model,the effect of a...

Question 7

Using the Keynesian model,the effect of an increase in the effective tax rate on capital would be to cause ________ in the real interest rate and ________ in output in the short run.

Accepted Answer

In the Keynesian model, an increase in the effective tax rate on capital leads to a decrease in investment and therefore a decrease in aggregate demand. This decrease in aggregate demand causes a decrease in output in the short run, as firms reduce production in response to lower demand. Moreover, the decrease in investment also reduces the demand for loanable funds, causing a decrease in the real interest rate. Therefore, both the real interest rate and output decrease in the short run as a result of an increase in the effective tax rate on capital.

Question 8

Easy monetary policy and tight fiscal policy lead to

Accepted Answer

Easy monetary policy and tight fiscal policy lead to an increase in the supply of money and a decrease in the demand for goods, respectively. This results in a lower interest rate and a decrease in the price level. Conversely, tight monetary policy and easy fiscal policy lead to higher real interest rates due to a decreased money supply and an increase in demand for goods.

Question 9

A Keynesian economy is described by the following equations. C^d = 250 + 0.5(Y - T)- 250r I^d = 250 - 250r G = 300 T = 300 L = 0.5Y - 500r + π^e M = 3000 = 1250 π^e = 0 (a)Calculate the values of the real interest rate,the price level,consumption,and investment for the economy in general equilibrium. (b)Now suppose government purchases increase to 350 with no change in taxes.What will be the real interest rate,the price level,output,consumption,and investment in the short run? (c)What will be the real interest rate,the price level,output,consumption,and investment in the long run?

Accepted Answer

The answer of A Keynesian economy is described by the...

Question 10

Suppose the economy's production function is Y = A(300N - N²).The marginal product of labor is MPN = A(300 - 2N).Suppose that A = 10.The supply of labor is NS = 0.05w + 0.005G. (a)If G is 26,000,what are the real wage,employment,and output? (b)If G rises to 26,400,what are the real wage,employment,and output? (c)If G falls to 25,600,what are the real wage,employment,and output? (d)In cases (b)and (c),what is the government purchases multiplier; that is,what is the change in output divided by the change in government purchases?

Accepted Answer

The answer of Suppose the economy's production function is Y...

Question 11

Suppose the government decided to ease monetary policy,then increase taxes.In the short run in the Keynesian model,the effect of these policies would be to ________ the real interest rate and ________ the level of output.

Accepted Answer

Easing monetary policy typically lowers real interest rates, while increasing taxes tends to reduce output. However, the combined effect on output is ambiguous because the expansionary effect of the monetary policy might offset the contractionary effect of the tax increase, making the overall impact on output uncertain.

Question 12

The following equations describe a Keynesian model of the economy. C^d= 500 + 0.5(Y - T)- 100r I^d = 350 - 100r L = 0.5Y - 200i π^e = 0.05,G = T = 200, = 1850 M = 3560 (a)Find the full-employment equilibrium values of the real interest rate,consumption,investment,and the price level. (b)Suppose government purchases decline to 175,with no change in taxes.What happens to the real interest rate,output,consumption,and investment in the short run (in which the price level is fixed)? What happens in the long run to the real interest rate,consumption,investment,and the price level? (c)Suppose instead that government purchases rise to 225,with no change in taxes,starting from the equilibrium in part (a).What happens to the real interest rate,output,consumption,and investment in the short run (in which the price level is fixed)? What happens in the long run to the real interest rate,consumption,investment,and the price level?

Accepted Answer

The answer of The following equations describe a Keynesian model...

Question 13

(a)Draw a figure,using the Keynesian IS-LM framework,of an economy in recession.
(b)If the Fed's goal is to move output to its full-employment level,what should it do with monetary policy? What will happen to the real interest rate? What is the effect on the price level? Show the result in your diagram.
(c)Suppose the Fed decides to keep the money supply unchanged.How could the government use fiscal policy to move the economy to full employment? Show the result in your diagram.
(d)How does the real interest rate differ between parts (b)and (c)?

Accepted Answer

The answer of (a)Draw a figure,using the Keynesian IS-LM framework,of...

Question 14

A monopolistically competitive firm prices its product using the markup pricing formula P = 1.25MC,where MC is the marginal cost of producing an additional unit.Suppose the demand for the firm's product is given by Q = 2000 - 0.1P,so the revenue from selling Q units of the product is PQ = 2000P - 0.1P². (a)If the marginal cost of producing each unit of the product is $10,000,calculate the price of the product,the quantity produced,and the firm's revenues,costs,and profits. (b)Now suppose the marginal cost rises to $11,000.The firm can keep the price of the product unchanged,or it can change the product's price at a total cost of $700,000.Calculate the price,quantity,revenues,costs,and profits as in part (a)both for changing the price and leaving the price unchanged.Should the firm change the price of its product?

Accepted Answer

The answer of A monopolistically competitive firm prices its product...

Question 15

In the Keynesian model,an increase in government purchases affects output by

Accepted Answer

According to the Keynesian model, an increase in government purchases will increase aggregate demand as national saving declines. This is because government purchases will lead to an increase in spending, which will increase demand for goods and services, thereby increasing output. This increase in aggregate demand may also lead to an increase in employment and a decrease in unemployment.

Question 16

In the Keynesian model in the long run,an increase in taxes causes the price level to ________ and the real interest rate to ________.

Accepted Answer

In the Keynesian model, an increase in taxes reduces consumer spending, leading to a decrease in aggregate demand. This decrease in demand leads to a lower price level. The reduced demand also leads to lower interest rates as there is less competition for funds.

Question 17

Using the Keynesian model,the effect of a decrease in the effective tax rate on capital would be to cause ________ in the real interest rate and ________ in output in the long run.

Accepted Answer

The answer of Using the Keynesian model,the effect of a...

Question 18

According to the Keynesian IS-LM model,what is the effect of each of the following on output,the real interest rate,employment,and the price level? Distinguish between the short run and the long run.
(a)Expected inflation rises.
(b)Wealth increases.
(c)Labor supply decreases due to a change in demographics.
(d)The future marginal product of capital decreases.

Accepted Answer

The answer of According to the Keynesian IS-LM model,what is...

Question 19

In the Keynesian model in the long run,an increase in the money supply will raise

Accepted Answer

In the long run, according to the Keynesian model, changes in the money supply only affect the price level and not the level of output. This is due to the assumption that in the long run, prices and wages are flexible, and any increase in the money supply will result in a proportional increase in prices. This means that the quantity theory of money holds true in the long run, where the price level is directly proportional to the money supply. Therefore, an increase in the money supply will only raise the price level and not the level of output.

Question 20

The 1980s were characterized by ________ monetary policy and ________ fiscal policy.

Accepted Answer

The 1980s, particularly in the United States under President Ronald Reagan, were characterized by tight monetary policy, led by the Federal Reserve to combat inflation, and easy fiscal policy, marked by tax cuts and increased military spending, which aimed to stimulate economic growth.

Quiz 11: Keynesianism: The Macroeconomics of Wage and Price Rigidity

According to Keynesians,the primary reason money is not neutral is

In the Keynesian model in the short run,a decrease in government purchases causes output to and the real interest rate to .

Suppose the government decided to tighten monetary policy and decrease government expenditures.In the short run in the Keynesian model,the effect of these policies would be to the real interest rate and the level of output.

Using the Keynesian model,the effect of a government-imposed ceiling on interest rates paid on personal checking accounts that is lower than the current market interest rate would be to cause in the real interest rate and in output in the short run.

Using the Keynesian model,the effect of an increase in the effective tax rate on capital would be to cause in the real interest rate and in output in the short run.

Easy monetary policy and tight fiscal policy lead to

Suppose the government decided to ease monetary policy,then increase taxes.In the short run in the Keynesian model,the effect of these policies would be to the real interest rate and the level of output.

In the Keynesian model,an increase in government purchases affects output by

In the Keynesian model in the long run,an increase in taxes causes the price level to and the real interest rate to .

Using the Keynesian model,the effect of a decrease in the effective tax rate on capital would be to cause in the real interest rate and in output in the long run.

In the Keynesian model in the long run,an increase in the money supply will raise

The 1980s were characterized by monetary policy and fiscal policy.