Question 1

Keynesians argue that an exogenous decrease in investment is likely to lead to
A) an increase in interest rates.
B) an increase in saving.
C) a decrease in the money supply.
D) a decrease in output.

Accepted Answer

According to Keynesians, a decrease in investment would lead to a decrease in aggregate demand, which in turn would lead to a decrease in output. This is because investment is a component of aggregate demand, and a decrease in investment would lead to a decrease in overall spending in the economy, which would lead to a decrease in output.

Question 2

Keynesians believe that
A) the link between money and aggregate demand is very strong.
B) interest rates will immediately respond to a change in investments.
C) fluctuations in the price level are a source of stability.
D) the interest rate will not necessarily respond to a drop in investments.

Accepted Answer

Keynesians argue that the interest rate might not always adjust quickly or effectively to changes in investment demand, suggesting that monetary policy can be ineffective in stabilizing the economy at times. This contrasts with classical views that emphasize rapid interest rate adjustments to equilibrate savings and investment.

Question 3

If there is an exogenous increase in investment spending, Monetarists argue that there would be little or no effect on real output because the interest rate would __________, investment would __________, saving would __________, and consumption would __________.
A) decline; increase; increase; decrease
B) decline; increase; decrease; increase
C) rise; decrease; decrease; increase
D) rise; decrease; increase; decrease

Accepted Answer

Monetarists believe in the long-term neutrality of money. They argue that an increase in investment spending would lead to higher interest rates, which in turn would crowd out private investment. This would lead to an increase in saving as people are incentivized to save more due to higher interest rates, and a decrease in consumption as higher interest rates discourage spending.

Question 4

Monetarists assume that there is a powerful direct link between aggregate demand and
A) velocity.
B) real money balances.
C) wage rates.
D) interest rates.

Accepted Answer

Monetarists believe that changes in the supply of money have a direct impact on real money balances, which in turn affects aggregate demand. Increases in the money supply lead to lower interest rates and higher real money balances, which stimulate spending and increase aggregate demand. Decreases in the money supply have the opposite effect, resulting in higher interest rates and lower real money balances, which decrease spending and decrease aggregate demand. While there may be indirect effects on velocity, wage rates, and interest rates, the direct link is between aggregate demand and real money balances.

Question 5

From the Keynesian perspective, an exogenous increase in investment is likely to lead to
A) a decrease in interest rates.
B) an increase in output.
C) an increase in the money supply.
D) a decrease in government spending.

Accepted Answer

According to Keynesian theory, an exogenous increase in investment leads to an increase in aggregate demand which in turn results in an increase in output or GDP. This is because increased investment leads to increased production and employment, which leads to a multiplier effect that increases output. Therefore, an exogenous increase in investment is likely to lead to an increase in output.

Question 6

The Keynesians argue that even if the interest rate does __________ in response to a decrease in investment, there is __________ guarantee that spending will increase very much.
A) increase; no
B) increase; a
C) decrease; no
D) decrease; a

Accepted Answer

According to Keynesians, even if the interest rate decreases, there is no guarantee that spending will increase very much. Therefore, the correct choice is C, which states that the interest rate decreases but there is no guarantee of a significant increase in spending.

Question 7

If inflation becomes a serious problem, a Monetarist-oriented President is likely to favor a policy emphasizing
A) slower monetary growth.
B) lower interest rates.
C) higher taxes.
D) wage and price controls.

Accepted Answer

Monetarists believe that inflation is primarily caused by increases in the money supply, so a Monetarist-oriented President would likely favor a policy of slower monetary growth to combat inflation. Lower interest rates, higher taxes, and wage and price controls are not typically favored by Monetarists as effective tools for addressing inflation.

Question 8

Monetarists argue that an exogenous fall in investment spending leads to
A) declining real output.
B) declining money supply.
C) declining velocity.
D) declining interest rates.

Accepted Answer

The answer of Monetarists argue that an exogenous fall in...

Question 9

If there is an exogenous decrease in investment spending, Monetarists argue that there would be little or no effect on real output because the interest rate would __________, investment would __________, saving would __________, and consumption would __________.
A) decline; increase; increase; decrease
B) decline; increase; decrease; increase
C) rise; decrease; decrease; increase
D) rise; decrease; increase; increase

Accepted Answer

Monetarists believe that a decrease in investment spending would lead to a decline in interest rates, which would then encourage an increase in investment and consumption, while saving would decrease.

Question 10

From the Monetarist perspective, an autonomous downward shift in investment will
A) shift the aggregate demand curve to the left.
B) shift the aggregate demand curve to the right.
C) have little effect on the aggregate demand curve.
D) cause a downward shift in the consumption function.

Accepted Answer

The answer of From the Monetarist perspective, an autonomous downward...

Question 11

Keynesians argue that the stabilizing effects of a fall in investment and the resulting decline in the price level assumed by the monetarists
A) will not happen because the price level will actually rise.
B) will happen.
C) is not likely to happen because the price level rarely ever falls.
D) may or may not happen depending on what happens to interest rates.

Accepted Answer

Keynesians believe that a fall in investment does not necessarily lead to a decline in the price level because prices are often sticky downwards due to factors like wage contracts and menu costs, making it rare for the price level to fall significantly in response to reduced demand.

Question 12

Monetarists argue that an exogenous increase in investment spending is likely to be offset by a decrease in
A) the money supply.
B) interest rates.
C) government spending.
D) consumption.

Accepted Answer

Monetarists believe that any exogenous increase in investment spending will lead to a reduction in consumption spending, which will offset the initial increase in investment spending. This is because increased investment spending will increase the demand for goods and services, causing prices to rise. As prices rise, consumers will reduce their consumption spending due to the higher cost of goods, leading to a decrease in aggregate demand. However, there is no reason to expect that an increase in investment spending would lead to a decrease in the money supply, interest rates or government spending.

Question 13

A relatively steep aggregate demand curve indicates that
A) velocity is relatively constant.
B) the economy is near full employment.
C) inflation is relatively high.
D) spending is insensitive to changes in the price level.

Accepted Answer

A steep aggregate demand curve indicates that changes in price level have a relatively small effect on aggregate expenditures, suggesting that spending is relatively insensitive to price changes. This could be due to factors such as sticky prices or a lack of available substitutes for goods and services. It does not necessarily indicate anything about velocity, employment, or inflation.

Question 14

A President who favors the use of government spending and taxes as tools to offset instability in the economy is likely to have advisers who are oriented toward
A) Keynesian economics.
B) Monetarist economics.
C) rational expectations.
D) the policies advocated by Milton Friedman.

Accepted Answer

Keynesian economics advocates for the use of government spending and taxation to address economic instability and promote economic growth. This approach is in contrast to Monetarist economics, which emphasizes the control of the money supply by the central bank to stabilize the economy. Rational expectations theory suggests that individuals make rational predictions about future events based on available information, while the policies advocated by Milton Friedman emphasize the importance of free markets and limited government intervention in the economy.

Question 15

Keynesians assume that there is a powerful direct link between aggregate demand and
A) velocity.
B) real money balances.
C) exogenous investment spending.
D) interest rates.

Accepted Answer

Keynesians emphasize the role of exogenous investment spending in influencing aggregate demand, viewing it as a primary driver of economic activity. They argue that investment spending decisions are influenced by factors like expectations and interest rates, rather than being directly linked to the velocity of money or real money balances.

Question 16

In the Keynesian system a drop in investment __________ cause the interest rate to __________.
A) will; fall
B) will; rise
C) does not; rise
D) does not necessarily; fall

Accepted Answer

In the Keynesian system, a drop in investment does not necessarily cause the interest rate to fall. This is because in the short run, the central bank can use monetary policy to keep the interest rate constant, even if there is a drop in investment. However, in the long run, a decrease in investment is likely to reduce the demand for loanable funds, which will cause the interest rate to fall.

Question 17

According to the Monetarists a decrease in investment spending initially __________ unemployment so that the price level __________. The resulting __________ in the real money supply __________ spending.
A) increases; rises; increase; decreases
B) increases; falls; increase; increases
C) increases; falls; increase; decreases
D) decreases; rises; increase; increases

Accepted Answer

Monetarists believe that a decrease in investment spending initially increases unemployment and causes the price level to fall. This fall in the price level leads to an increase in the real money supply, which in turn increases spending.

Question 18

__________ argue that any exogenous decrease in investment spending would be countered automatically by either increased consumption or interest-sensitive investment spending.
A) Monetarists
B) Keynesians
C) Classical economists
D) None of the above.

Accepted Answer

Keynesians argue that any exogenous decrease in investment spending would be countered automatically by either increased consumption or interest-sensitive investment spending.

Question 19

According to the Monetarists an increase in investment spending initially __________ unemployment so that the price level __________. The resulting __________ in the real money supply __________ spending.
A) increases; rises; increase; decreases
B) increases; falls; increase; increases
C) decreases; falls; decrease; increases
D) decreases; rises; decrease; decreases

Accepted Answer

The answer of According to the Monetarists an increase in...

Question 20

A relatively flat aggregate demand curve indicates that
A) velocity is relatively constant.
B) the economy is near full employment.
C) inflation is relatively low.
D) spending is sensitive to changes in the price level.

Accepted Answer

A relatively flat aggregate demand curve suggests that spending is highly sensitive to changes in the price level, meaning small changes in prices can lead to large changes in the quantity of goods and services demanded.

Quiz 26: An Aggregate Supply and Demand Perspective on Money and Economic Stability

Keynesians argue that an exogenous decrease in investment is likely to lead to

Keynesians believe that

If there is an exogenous increase in investment spending, Monetarists argue that there would be little or no effect on real output because the interest rate would , investment would , saving would , and consumption would .

Monetarists assume that there is a powerful direct link between aggregate demand and

From the Keynesian perspective, an exogenous increase in investment is likely to lead to

The Keynesians argue that even if the interest rate does in response to a decrease in investment, there is guarantee that spending will increase very much.

If inflation becomes a serious problem, a Monetarist-oriented President is likely to favor a policy emphasizing

Monetarists argue that an exogenous fall in investment spending leads to

If there is an exogenous decrease in investment spending, Monetarists argue that there would be little or no effect on real output because the interest rate would , investment would , saving would , and consumption would .

From the Monetarist perspective, an autonomous downward shift in investment will

Keynesians argue that the stabilizing effects of a fall in investment and the resulting decline in the price level assumed by the monetarists

Monetarists argue that an exogenous increase in investment spending is likely to be offset by a decrease in

A relatively steep aggregate demand curve indicates that

A President who favors the use of government spending and taxes as tools to offset instability in the economy is likely to have advisers who are oriented toward

Keynesians assume that there is a powerful direct link between aggregate demand and

In the Keynesian system a drop in investment cause the interest rate to .

According to the Monetarists a decrease in investment spending initially unemployment so that the price level . The resulting in the real money supply spending.

__________ argue that any exogenous decrease in investment spending would be countered automatically by either increased consumption or interest-sensitive investment spending.

According to the Monetarists an increase in investment spending initially unemployment so that the price level . The resulting in the real money supply spending.

A relatively flat aggregate demand curve indicates that