Deck 8: Keynesian System Iv: Aggregate Supply and Demand

Question 1

In the Keynesian model with a fixed price level and a fixed money wage,an increase in the money supply will cause

A)output to fall and interest rates to fall.
B)output to remain unchanged.
C)output to rise and the price level to fall.
D)output to rise and interest rates to fall.

Answer 1

D

Question 2

If the Keynesian model is correct,what should be the correlation between interest rates,the price level,real wages,and output over the business cycle? Provide graphs of the labor market,AD/AS,and IS/LM to illustrate.

Answer 2

In the Keynesian model,changes in expectations drive changes in investment,shifting the IS curve and AD to the right.As a result,interest rates,the price level,and income should be positively correlated.In addition,the higher price level reduces the real wage; so real wages should be negatively correlated with income.

Question 3

In the case of an increase in government spending where the price level varies while the money wage is fixed,output

A)rises and prices fall by more than if the price level was fixed.
B)falls and price rise by more than if the price level was fixed.
C)rises by more and the price level rises by less than if the price level was fixed.
D)and the price level are fixed.
E)rises and prices fall by more than if the price level was fixed.

Answer 3

E

Question 4

Assuming that as a result of observed past increases in the aggregate price level,workers' expectation of the current price level rises.Then,

A)less labor will be supplied at each money wage because with the higher expectation about the aggregate price level since a given money wage corresponds to a lower real wage.
B)the firm has to pay a higher money wage in order to obtain a given quantity of labor.
C)more labor will be supplied at each money wage because with the higher expectation about the aggregate price level since a given money wage corresponds to a higher real wage.
D)Both a and b
E)Both b and c

Question 5

In the IS-LM model,the implicit assumption made about aggregate supply was that the

A)aggregate supply schedule was vertical because prices were flexible.
B)aggregate supply schedule was horizontal because prices were fixed.
C)aggregate supply schedule was upward sloping to the right because wages and prices were fixed.
D)supply of output was fixed.
E)none of the above.

Question 6

Why is the IS-LM model a model of aggregate demand? Illustrate this using an IS-LM graph.

Question 7

Do workers and firms care more about wage stability or employment stability? Why? Explain what both Keynesian wage theories suggest.

Question 8

If interest rates,prices,and output are all rising,then according to the Keynesian model,these changes must be caused by

A)an increase in aggregate supply.
B)a shift to the right of the LM curve.
C)a shift to the right of the LM curve.
D)a shift up in the IS curve.
E)none of the above.

Question 9

In addition to consumption being a function of income,suppose that it is also a function of interest rates.Now,lower interest rates make borrowing to consume easier,encouraging overall consumption.

A)How would such a change impact the shape of the IS and LM curves? AD curve?
B)How would such a change impact the effectiveness of monetary and fiscal policy? Multiple-Choice Questions:

Question 10

In the Keynesian model with both a variable price level and money wage,the aggregate supply function will be

A)upward sloping but flatter than for the variable-price/fixed-wage version of the model.
B)upward sloping but steeper than for the variable-wage/fixed-price version of the model.
C)vertical.
D)horizontal.

Question 11

In the Keynesian model with a fixed money wage but a flexible price level,an increase in taxes will lower

A)output and the price level,but leave the interest rate unchanged.
B)output,the price level and the interest rate.
C)output and the interest rate,but leave the price level unchanged.
D)output and the price level,but increase the interest rate.
E)the price level and the interest rate,but leave output unchanged.

Question 12

If inflation and unemployment is rising at the same time,then this is most likely the result of a shift

A)downward in the aggregate demand schedule.
B)upward in the aggregate demand schedule.
C)downward in the aggregate supply schedule.
D)upward in the aggregate supply schedule.
E)none of the above can explain this

Question 13

What happened to the price level,money wages,real wages,and unemployment during the Great Depression? How would you explain these observations in the Keynesian model? In the Classical model?

Question 14

Suppose the government want to increase aggregate demand without increasing interest rates.You would recommend

A)reducing transfer payments and increasing the money supply.
B)increasing government spending and reducing the money supply.
C)increasing taxes and the money supply.
D)increasing government spending and the money supply.

Question 15

If the classical model is correct,what should be the correlation between interest rates,the price level,real wages,and output over the business cycle? Provide graphs of the labor market,AD/AS,and IS/LM to illustrate.

Question 16

In the Keynesian model with a variable money wage and variable price level,an increase in the money supply lead to a rise in all of the following except

A)price level.
B)output.
C)real wage.
D)level of employment.
E)all of these rise

Question 17

During the recession of 1990-1991,interest rates in the U.S.dropped by nearly two percentage points while output rose and inflation fell.Can you explain this result in the Keynesian model? Show your explanation graphically using the IS-LM and AD-AS models.

Question 18

An increase in price expectations in the Keynesian model will shift

A)labor demand and aggregate supply to the left.
B)labor demand to the left and aggregate supply to the right..
C)labor demand and aggregate demand to the right.
D)labor supply and aggregate supply to the left.
E)labor supply to the right and aggregate supply to the left.

Question 19

Cite the difference(s)between the classical and Keynesian aggregate demand schedules.What things shift aggregate demand in the classical model? What things shift aggregate demand in the Keynesian model?

Question 20

What is the key difference between the classical and Keynesian aggregate supply functions? What is the key factor that drives these differences?

Question 21

According to the Keynesians,labor contracts

A)are unimportant for modern labor markets because few worker are unionized.
B)mean that real wages are inflexible.
C)mean that money wages never adjust.
D)imply that nominal wages adjust,but only periodically.

Question 22

In the Keynesian theory of labor supply,price expectations are based

A)only on the future behavior of the price level.
B)on the past,present,and future behavior of the price level.
C)on the present behavior of the price level.
D)on the past behavior of the price level.

Question 23

The Keynesian labor supply function is shown as

A)N^s = g(W/P).
B)N^s = g(P/W).
C)N^s = t(W/P^e).
D)N^s = t(P^e/W).

Question 24

According to the Keynesian fixed wage theory,real wages should be

A)positively correlated with income.
B)not correlated with income.
C)fixed.
D)negatively correlated with income.

Question 25

According to Keynesian theory,the profit-maximizing firm demands labor up to the point at which

A)the real wage is equal to the marginal productivity of labor.
B)the money wage paid to labor is just equal to the money value of the marginal product of labor.
C)labor and capital costs are equal.
D)a and/or b are correct.

Question 26

The aggregate supply schedule is steeper where the money wage is more variable than where the money wage is fixed because the rise in the money wage in the

A)fixed-wage case dampens the effect on employment and output from an increase in the price level.
B)variable-wage case dampens the effect on employment and output from an increase in the price level.
C)variable-wage case heightens the effect on employment and output from an increase in the price level.
D)all of the above

Question 27

Which of the following variables will shift the classical aggregate demand curve?

A)An increase in government spending
B)A decrease in taxes
C)An increase in autonomous investment expenditures
D)An increase in the money stock
E)All of the above

Question 28

An increase in the expected price level will

A)increase labor supply,money wages,decrease the price level and income.
B)decrease labor supply,increase money wages,decrease the price level and income.
C)decrease labor supply,decrease money wages,and decrease the price level and income.
D)increase labor supply,decrease money wages,decrease the price level,and increase income.

Question 29

According to Keynes,money wages

A)would adjust in the short run in order to maintain full-employment.
B)are inflexible in the short run are cannot guarantee full-employment levels of output.
C)are inflexible and fall as the price level rises.
D)are more flexible downward than upward direction.

Question 30

The classical model differs from the Keynesian model in that

A)monetary policy does not impact output in the Keynesian model.
B)the classical model focuses on the long-run and the Keynesian model focuses on the short-run.
C)fiscal policy is more powerful in the classical model than in the Keynesian model.
D)the classical model believes monetary policy is a powerful impact on output and fiscal policy is not.
E)None of the above

Question 31

According to Keynes' fixed money wage theory,when the price level is higher than expected the real wage is ____ than expected and unemployment is ______ than expected.

A)lower; lower
B)higher,higher
C)lower; higher
D)higher; lower

Question 32

The position of the Keynesian aggregate demand schedule does not depend on the

A)level of government spending.
B)level of tax collections.
C)level of autonomous investment expenditures.
D)quantity of money.
E)the price of inputs such as oil.

Question 33

The classical labor supply function is shown as

A)N^s = g(P/W).
B)N^s = g(W/P).
C)N^s = t(W/P^e).
D)N^s = t(P^e/W).

Question 34

According to the contract theory of wages,firms and workers agree on a contract that fixes

A)money wages.
B)real wages.
C)money wages and employment.
D)real wages and employment.

Question 35

Which of the following statements is (are)correct? Keynesian economists

A)favor neither active monetary policies nor active fiscal policies to stabilize the economy.
B)favor both active monetary and fiscal policies to manage aggregate demand.
C)are known as noninterventionists.
D)are perceived as favoring smaller,less active government policy.
E)Either b or d

Question 36

Assuming a horizontal aggregate supply curve,output will change when

A)monetary or fiscal policy changes.
B)monetary policy changes.
C)fiscal policy changes.
D)capital,labor,or technology changes.
E)all of the above

Question 37

An increase in the expected price level lead to

A)higher money wages and lower real wages.
B)higher money wages and real wages.
C)no change in money wages but lower real wages.
D)lower money wages and higher real wages.

Question 38

Compared to the fixed-price/fixed-wage model,in the Keynesian model with a flexible price but fixed wage,an increase in the money stock will cause output to rise by

A)less while the interest rate will fall by more.
B)less and the interest rate to fall by less.
C)more but the interest rate to fall by less.
D)more and the interest rate to fall by more.

Question 39

According to the Keynesian fixed wage theory,real wages should be

A)positively correlated with income.
B)not correlated with income.
C)fixed.
D)negatively correlated with income.

Question 40

The Keynesian aggregate demand curve slopes downward because for any given money supply,an increase in the price level ______ real money holdings which _____ the interest rate and _____ income.

A)increases; lowers; increases
B)reduces; raises; reduces
C)reduces; lowers; increases
D)increases; raises; reduces

Question 41

If everyone expects prices to fall but they do not,then

A)nothing happens.
B)the IS curve shifts to the left and the AD curve shifts to the right.
C)both IS and AD shift to the right.
D)both IS and AD shift to the left.
E)the IS curve shifts to the right,the AD curve shifts to the left.

Question 42

In the contract theory of wages,if workers and firms agree to enter into contracts in which their money wage adjusts automatically to changes in the actual price level,then aggregate supply

A)slopes upward and to the right.
B)shifts upward.
C)is horizontal.
D)is vertical.

Question 43

Which of the following explains why the AD curve is downward sloping?

A)a lower price level forces the government to reduce taxes,shifting the IS curve to the right and increasing income.
B)A lower price level forces the central bank to increase the money supply,shifting the LM curve to the right and increasing income.
C)A lower price level increases real money balances,shifting the LM curve to the right and increasing income.
D)none of the above are correct.

Question 44

If business cycles are caused by changes in aggregate supply,you would expect to see

A)prices and unemployment moving in the same direction.
B)price and unemployment moving in opposite directions.
C)prices not moving with unemployment.
D)unemployment is not included in the Keynesian model.

Question 45

In the Keynesian model,if the actual price level is higher than the expected price level,then

A)output is above potential output.
B)output is always at potential output.
C)output is below potential output.
D)output is moving towards potential output.

Question 46

All of the following will shift the AD curve to the right except a(n):

A)increase in consumer confidence.
B)decrease in taxes.
C)increase in government spending.
D)increase in the MPC.
E)increase in transfer payments.

Question 47

The Keynesian model differs from the classical model in that

A)people do not have perfect information about the future in the Keynesian model.
B)real wages are not flexible in the Keynesian model.
C)monetary policy affects aggregate demand in the Keynesian model.
D)expectations are crucial in the classical model.
E)all of the above.

Question 48

Which of the following statements is correct?

A)The classical aggregate supply schedule is horizontal while the Keynesian aggregate supply schedule slopes upward to the left.
B)The classical aggregate supply schedule is vertical while the Keynesian aggregate supply schedule is horizontal.
C)The classical aggregate supply schedule is vertical while the Keynesian aggregate supply schedule slopes upward to the right.
D)The classical aggregate supply schedule slopes upward to the right while the Keynesian aggregate supply schedule is vertical.
E)none of the above are correct.

Question 49

The United States and other industrialized countries experienced rising inflation accompanied by a recession during the 1970s.This phenomenon was described as (a)

A)hyperinflation.
B)stagnation.
C)stagflation.
D)depression.

Question 50

The classical theory of aggregate supply where markets are perfectly flexible

A)may or may not be compatible with the Keynesian system.
B)is easily added the IS-LM framework of aggregate demand.
C)is fundamentally incompatible with the Keynesian system.
D)is consistent with the IS-LM framework if all shocks are to the IS curve.
E)none of the above.

Question 51

If business cycles are caused by changes in aggregate demand,you would expect to see

A)prices and unemployment moving in the same direction.
B)price and unemployment moving in opposite directions.
C)prices not moving with unemployment.
D)unemployment is not included in the Keynesian model.

Question 52

An decrease in the price of oil on the world market would cause aggregate output to

A)rise and the aggregate demand to rise.
B)rise and the aggregate demand to rise.
C)rise and the aggregate supply to rise.
D)fall and the aggregate supply to fall.

Question 53

Stagflation can be explained by

A)the IS curve shifting up.
B)the IS curve shifting down.
C)the LM curve shifting to the right.
D)the LM curve shifting to the left.
E)none of the above.

Question 54

The Keynesian AD curve differs from the classical AD curve in that:

A)the classical AD curve can shift in response to non-monetary shocks.
B)the Keynesian AD curve can shift in response to monetary shocks.
C)the Keynesian AD curve can shift in response to non-monetary shocks.
D)there is no difference,both are determined by the quantity theory.
E)none of the above.

Question 55

The difference between the Keynesian and classical labor supply functions is that in the Keynesian version

A)workers know the real wage while in the classical system workers must form an expectation of the price level.
B)workers must form an expectation of the price level while the workers know the real wage in the classical system.
C)workers are assumed to be interested in the money wage while in the classical version workers know the real wage.
D)labor supply depends on the actual real wage while labor supply depends on the expected real wage in the classical system.

Question 56

In the face of an increase in oil prices,if the government's primary objective is to keep prices from falling,then policymakers should

A)reduce taxes.
B)reduce the money supply.
C)increase government spending.
D)increase aggregate supply through regulation.

Question 57

Which of the following statements is correct?

A)The classical aggregate AD curve can be shifted by monetary and non-monetary factors.
B)The classical AS schedule is horizontal while the Keynesian aggregate AS schedule is vertical.
C)The Keynesian AD curve only shifts in response to monetary factors.
D)The classical aggregate supply schedule slopes upward to the right while the Keynesian aggregate supply schedule is vertical.
E)none of the above are correct.