Question 1

The short-run aggregate supply curve is positively sloped because
A) real interest rates rather than nominal rates are used.
B) some price adjustments take place in the short-run.
C) no price adjustments take place in the short-run.
D) complete price adjustments take place in the short-run.

Accepted Answer

The short-run aggregate supply curve is positively sloped because some price adjustments take place in the short-run. In the short-run, input prices may not adjust immediately to changes in output prices, causing producers to supply more at higher output prices and less at lower output prices. This leads to a positively sloped short-run aggregate supply curve.

Question 2

Keynesian economists argue that
A) the natural rate of unemployment is below the actual rate.
B) unemployment is a long-lasting phenomenon in the economy.
C) unemployment only exists during periods of war in the economy.
D) the natural rate of unemployment is zero.

Accepted Answer

Keynesian economists believe that unemployment can persist in the economy due to insufficient demand, and it is not just a temporary issue.

Question 3

Refer to the above figure. Which of the graphs is consistent with the long-run aggregate supply curve?
A) Graph A
B) Graph B
C) Graph C
D) Graph D

Accepted Answer

The long-run aggregate supply curve is vertical, indicating that in the long run, the economy's potential output is fixed and independent of the price level. Graph A shows a vertical line, which is consistent with the long-run aggregate supply curve.

Question 4

What is the underlying assumption of the original, simplified Keynesian model?
A) The relevant range of the short-run aggregate supply curve (SRAS) is vertical.
B) The relevant range of the aggregate supply curve (AS) is vertical.
C) The relevant range of the short-run aggregate supply curve (SRAS) is horizontal.
D) The relevant range of the long-run aggregate supply curve (LRAS) is horizontal.

Accepted Answer

The original, simplified Keynesian model assumes that the relevant range of the short-run aggregate supply curve (SRAS) is horizontal. This means that changes in aggregate demand will primarily affect output and employment in the short run, with little impact on the price level. In contrast, the long-run aggregate supply curve (LRAS) is assumed to be vertical, meaning that in the long run, changes in aggregate demand will primarily affect the price level, with little impact on output and employment.

Question 5

Along a short-run aggregate supply curve, which of the following is (are) held constant?
A) real GDP
B) aggregate demand
C) input prices
D) relative prices of goods and services

Accepted Answer

Along a short-run aggregate supply curve, input prices are held constant, while real GDP and aggregate demand can vary. The relative prices of goods and services may shift, but they are not held constant.

Question 6

The short-run aggregate supply curve in modern Keynesian analysis represents the relationship between
A) the real output of goods and services in the economy and the price level.
B) the real output of goods and services in the economy and the price level when people have fully adjusted their behavior.
C) the real output of goods and services in the economy and the price level when people have not fully adjusted their behavior.
D) the nominal output of goods and services and the real output of goods and services.

Accepted Answer

The short-run aggregate supply curve in modern Keynesian analysis represents the relationship between the real output of goods and services in the economy and the price level when people have not fully adjusted their behavior. This means that there may be some market imperfections or frictions that prevent wages and prices from adjusting immediately to changes in demand or supply. As a result, changes in demand or supply can temporarily affect both output and prices in the short run.

Question 7

Keynesian economists argue that
A) prices and wages are flexible.
B) prices and wages must be set by government.
C) prices and wages are subject to downward "stickiness."
D) prices and wages depend on minimum wage law.

Accepted Answer

Keynesian economists argue that due to various factors such as labor market imperfections, long-term contracts, and social norms, prices and wages are subject to downward "stickiness," meaning they do not adjust quickly or easily in response to changes in supply and demand. This can lead to unemployment and slow economic growth, and Keynesians advocate for government intervention to stimulate demand and employment during economic downturns. They do not necessarily believe that prices and wages should be set by government, nor do they solely rely on minimum wage laws to boost aggregate demand.

Question 8

-Refer to the above figure. Which of the graphs is consistent with the Keynesian short-run aggregate supply curve?
A) Graph A
B) Graph B
C) Graph C
D) Graph D

Accepted Answer

The answer of 
-Refer to the above figure. Which of...

Question 9

According to Keynesian economics, if there are unutilized resources in the economy and aggregate demand increases
A) real GDP will rise and price level will remain constant.
B) real GDP will fall and price level will remain constant.
C) real GDP will rise and price level will rise.
D) real GDP will rise and price level will fall.

Accepted Answer

Keynesian economics argues that in the short run, an increase in aggregate demand will lead to an increase in real GDP, but with a relatively small increase in the price level. This is because there are still unutilized resources in the economy, such as unemployed workers or idle factories, that can be put to use to meet the increased demand without significantly driving up prices. Therefore, choice A is the correct answer.

Question 10

Keynesian economists would likely argue that the classical model is which of the following?
A) a long-run theory
B) a short-run theory
C) both a long-run and short-run theory
D) a sticky price theory

Accepted Answer

Keynesian economists view the classical model as a long-run theory because it assumes that markets clear quickly and naturally, leading to full employment in the long run. However, Keynesians argue that in the short run, prices and wages may be sticky, causing temporary deviations from full employment. Therefore, the classical model is not seen as an appropriate short-run theory by Keynesians.

Question 11

According to Keynesian economics, if there are unutilized resources in the economy and aggregate demand decreases
A) real GDP will rise and price level will remain constant.
B) real GDP will fall and price level will remain constant.
C) real GDP will rise and price level will rise.
D) real GDP will rise and price level will fall.

Accepted Answer

According to Keynesian economics, if there are unutilized resources in the economy and aggregate demand decreases, real GDP will fall but the price level will remain constant. This is because with unutilized resources, firms can increase production without increasing costs, so a decrease in demand will lead to a decrease in output without affecting prices. This is known as a recessionary gap.

Question 12

The short-run aggregate supply curve in modern Keynesian analysis is
A) horizontal.
B) vertical.
C) upward sloping.
D) downward sloping.

Accepted Answer

In modern Keynesian analysis, the short-run aggregate supply curve is upward-sloping, indicating that as the price level increases, businesses are willing to supply more output in the short-run due to expectations of increased aggregate demand. However, in the long-run, the aggregate supply curve becomes vertical, as factors such as wages and production costs adjust to the price level.

Question 13

The horizontal portion of the short-run aggregate supply curve in which there is excessive unemployment and unused capacity in the economy is
A) Say's law.
B) the classical short-run aggregate supply curve.
C) the Keynesian short-run aggregate supply curve.
D) exists when prices are flexible.

Accepted Answer

The horizontal portion of the short-run aggregate supply curve in which there is excessive unemployment and unused capacity in the economy is associated with the Keynesian short-run aggregate supply curve. In this range, prices are sticky or inflexible, and therefore, changes in demand do not lead to changes in prices, but only lead to changes in the quantity of output supplied. This situation can arise during a recession or a period of low demand.

Question 14

John Maynard Keynes developed his economic theories in the
A) 1890s.
B) 1900s.
C) 1930s.
D) 1990s.

Accepted Answer

Keynes developed his economic theories during the 1930s, during and after the Great Depression. He published "The General Theory of Employment, Interest and Money" in 1936 which outlined his ideas on government intervention in the economy to address economic downturns.

Question 15

How does the original, simplified Keynesian model compare with modern Keynesian analysis?
A) The original Keynesian model assumed price flexibility whereas the modern analysis does not.
B) In both cases, the short-run aggregate supply curve (SRAS) is horizontal.
C) Modern analysis shows an upward sloping SRAS to reflect some price flexibility. The original Keynesian model's SRAS is horizontal and assumes sticky prices.
D) all of the above

Accepted Answer

The original Keynesian model assumed a horizontal SRAS with sticky prices, while modern Keynesian analysis incorporates some price flexibility and thus an upward sloping SRAS. However, both models focus on the short run and the role of aggregate demand in determining output and employment levels. Option A is incorrect because the original Keynesian model assumed sticky prices, not price flexibility. Option B is incorrect because only the original Keynesian model has a horizontal SRAS, while modern analysis incorporates some price flexibility. Option D is incorrect because option A is not true.

Question 16

According to Keynes, the "stickiness" of wage rates could best be explained by
A) minimum wage laws.
B) unions and long-term labor contracts.
C) short-term labor contracts.
D) government interference.

Accepted Answer

Keynes believed that wage stickiness resulted from the power of unions and the prevalence of long-term labor contracts, which prevented wages from easily adjusting downward to reach a new equilibrium in the face of reduced demand for labor.

Question 17

Some economists believe that a positive aggregate demand shock to an economy with large amounts of excess capacity and unemployment does NOT necessarily cause an increase in prices. Economists who adhere to this belief are followers of
A) classical economics.
B) Say's laws of economics.
C) Keynesian economics.
D) supply-side economics.

Accepted Answer

Economists who believe that a positive aggregate demand shock does not necessarily cause an increase in prices are followers of Keynesian economics. This is because Keynesian economics emphasizes the role of aggregate demand in driving economic growth and employment, and argues that in a depressed economy with high levels of idle resources, an increase in demand can lead to increased production and employment rather than inflation. Classical economics, on the other hand, emphasizes the role of supply in driving the economy and tends to argue that prices will adjust to ensure that supply and demand are always balanced. Say's Law of economics states that supply creates its own demand, which implies that there can never be a general overproduction or underproduction in the economy. Supply-side economics argues that lower taxes and deregulation can increase growth by increasing the supply of goods and services.

Question 18

The Keynesian short-run aggregate supply curve in the simplified Keynesian model is unrealistic because
A) a vertical curve does not make economic sense.
B) prices and wages will never decrease.
C) the classical model is better in explaining how the economy operates.
D) some price adjustments do take place in the short run.

Accepted Answer

The Keynesian short-run aggregate supply curve is considered unrealistic by some because it suggests that prices do not adjust in the short run. However, in reality, some price adjustments do occur even in the short run, making the assumption of completely rigid prices less accurate.

Question 19

Keynesian economists argue that
A) equilibrium real GDP is demand-determined.
B) equilibrium real GDP is supply-determined.
C) equilibrium real GDP can be reached only in a theoretical economy.
D) reaching equilibrium real GDP always results in inflation.

Accepted Answer

Keynesian economists argue that equilibrium real GDP is demand-determined, meaning that it is primarily influenced by aggregate demand in the economy. This is in contrast to the classical theory of economics, which argues that equilibrium is supply-determined. Keynesians believe that government intervention is necessary to maintain full employment and stabilize the economy, while classical economists favor minimal government involvement.

Question 20

The horizontal short-run aggregate supply curve
A) assumes that wages and all other input prices are constant.
B) shows that real GDP can be increased only when prices increase.
C) assumes that there is full employment in the economy.
D) assumes that opportunity cost is constant.

Accepted Answer

The horizontal short-run aggregate supply curve assumes that wages and all other input prices are constant, meaning that the increase in the price level will not affect the cost of production. Therefore, output will increase without any increase in the price level, resulting in a horizontal supply curve.

Quiz 11: Classical and Keynesian Macro Analyses

The short-run aggregate supply curve is positively sloped because

Keynesian economists argue that

Refer to the above figure. Which of the graphs is consistent with the long-run aggregate supply curve?

What is the underlying assumption of the original, simplified Keynesian model?

Along a short-run aggregate supply curve, which of the following is (are) held constant?

The short-run aggregate supply curve in modern Keynesian analysis represents the relationship between

Keynesian economists argue that

-Refer to the above figure. Which of the graphs is consistent with the Keynesian short-run aggregate supply curve?

According to Keynesian economics, if there are unutilized resources in the economy and aggregate demand increases

Keynesian economists would likely argue that the classical model is which of the following?

According to Keynesian economics, if there are unutilized resources in the economy and aggregate demand decreases

The short-run aggregate supply curve in modern Keynesian analysis is

The horizontal portion of the short-run aggregate supply curve in which there is excessive unemployment and unused capacity in the economy is

John Maynard Keynes developed his economic theories in the

How does the original, simplified Keynesian model compare with modern Keynesian analysis?

According to Keynes, the "stickiness" of wage rates could best be explained by

Some economists believe that a positive aggregate demand shock to an economy with large amounts of excess capacity and unemployment does NOT necessarily cause an increase in prices. Economists who adhere to this belief are followers of

The Keynesian short-run aggregate supply curve in the simplified Keynesian model is unrealistic because

Keynesian economists argue that

The horizontal short-run aggregate supply curve