Question 1

What was John Maynard Keynes's primary message concerning recessions and depressions?
A) Governments should not intervene in the economy but leave the economy to recover of its own accord from a recession or depression.
B) Recessions and depressions can occur as a result of inadequate aggregate demand for goods and services.
C) Long-run policy intervention by governments is needed to avoid recessions and depressions.
D) Recessions and depressions are entirely monetary phenomena.

Accepted Answer

John Maynard Keynes believed that recessions and depressions could occur as a result of inadequate aggregate demand for goods and services. He argued that government intervention, through fiscal and monetary policy, was necessary to stimulate demand and promote economic growth during times of recession or depression.

Question 2

In the Keynesian cross diagram the 45 degree line
A) has no economic significance.
B) connects all points where there is full employment in the economy.
C) connects all points where consumption spending would be equal to national income.
D) connects all points where spending on imports is equal to the value of export spending.

Accepted Answer

The 45 degree line represents points where national income (Y) is equal to aggregate expenditure (E). Since consumption spending is a major component of aggregate expenditure, the line also represents points where consumption spending is equal to national income.

Question 3

A key element of Keynesian analysis relates to:
A) policies to reduce the difference between planned and actual spending and investment
B) using taxation as a means to influence the interest rate in an economy.
C) The similarities between short term fluctuations in macroeconomic variables and how they behave in the long run
D) the distinction between planned spending and investment and actual spending and investment

Accepted Answer

D

Question 4

Refer to figure 1 below. If the vertical distance labelled Z represents a deflationary gap then which of the following statements is true? Figure 1 A) Y₂ represents the full employment level of output and total expenditure must be reduced from C+I+G+(X-M)₂ to C+I+G+(X-M)₁ in order to increase output and employment. B) Y₁ represents the full employment level of output and total expenditure must be reduced from C+I+G+(X-M)₂ to C+I+G+(X-M)₁ in order to increase output and employment. C) Y₂ represents the full employment level of output and total expenditure must be increased from C+I+G+(X-M)₁ to C+I+G+(X-M)₂ in order to increase output and employment. D) Y₁ represents the full employment level of output and total expenditure must be increased from C+I+G+(X-M)₁ to C+I+G+(X-M)₂ in order to increase output and employment.

Accepted Answer

The answer of Refer to figure 1 below. If the...

Question 5

If the marginal propensity to consume in the economy is 0.8 and the government increases its spending this year by €10 billion, what will be the additional increase in expenditure in the economy next year?
A) €10 billion
B) €8 billion
C) €2 billion
D) €0.8 billion

Accepted Answer

The additional increase in expenditure in the economy next year will be determined by the multiplier effect. The multiplier is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume. In this case, the multiplier is 1/(1-0.8) = 5. So, the additional increase in expenditure in the economy next year will be 5 times the initial government spending increase of €10 billion, which is €50 billion. However, we are asked for the additional increase in expenditure in the economy next year, which is the increase over and above what would have happened anyway due to the initial €10 billion government spending increase (known as the "autonomous" increase). The autonomous increase will be equal to MPC times the initial government spending increase, which is 0.8 x €10 billion = €8 billion. Therefore, the additional increase in expenditure in the economy next year (i.e. the increase over and above the €8 billion autonomous increase) will be €50 billion - €8 billion = €42 billion.

Question 6

The LM curve connects points where the money market is in equilibrium and the demand for money is equal to the supply of money at different interest rates.

Accepted Answer

This statement is true. The LM curve reflects the relationship between interest rates and the level of income and output that generates equilibrium in the money market. At each point on the curve, the quantity of money demanded is equal to the quantity of money supplied, and the interest rate that clears the market is determined.

Question 7

Which of the following statements about Keynesian views is true?
A) Keynes' analysis was mainly concerned with the long-run
B) Keynes fully supported the classical view that markets were efficient and cleared quickly
C) Demand deficient output meant that governments had a responsibility to boost demand to maintain full employment in the short term
D) Responsibility for fiscal policy should be transferred to central banks because governments could not be trusted to implement tax changes appropriately in times of recession.

Accepted Answer

Keynes argued that during periods of demand deficient output, which can lead to unemployment, governments had a responsibility to stimulate demand through fiscal policy such as increased government spending or tax cuts, in order to maintain full employment in the short term. Keynes' analysis focused on the short-term effects of economic policies in order to stabilize the economy during times of crisis, rather than solely on the long-run. Keynes challenged the classical view that markets were efficient and self-correcting in the short run, and emphasized the importance of government intervention. He did not advocate for the transfer of fiscal policy responsibility to central banks.

Question 8

The multiplier model implies that
A) additional spending by the government will be a multiple of the tax rise needed to fund the spending.
B) changes in autonomous spending will lead to an increase in national income which is greater than the initial increase in spending.
C) changes in government spending will always lead to a proportionate increase in national income.
D) there are no leakages from the circular flow of income.
E) aggregate demand rises by a constant multiple of the change in consumption spending.

Accepted Answer

The multiplier model states that changes in autonomous spending (such as government spending) will lead to an increase in national income that is greater than the initial increase in spending. This is because the increased spending creates a multiplier effect as more income is generated and spent in the economy. The magnitude of the multiplier effect depends on the marginal propensity to consume (MPC), which is the fraction of additional income that is spent on consumption. The multiplier model also takes into consideration leakages from the circular flow of income, such as savings and imports, which reduces the overall size of the multiplier effect.

Question 9

John Maynard Keynes' General Theory was an attempt to explain how economies operate at equilibrium in the long run.

Accepted Answer

John Maynard Keynes' General Theory was actually an attempt to explain how economies operate when they are not at equilibrium, especially during times of recessions or depressions. It focused on the role of government in stabilizing the economy through fiscal and monetary policy.

Question 10

A deflationary gap exists when there is a difference between the price level in an economy and a fall in the level of national income.

Accepted Answer

A deflationary gap occurs when aggregate demand is less than aggregate supply at full employment, leading to unemployment and underutilized resources, not specifically due to a difference in price level and national income.

Question 11

The IS curve measures points where the inflation rate and national income are the same.

Accepted Answer

The IS curve measures points where the interest rate and national income are the same, not the inflation rate.

Question 12

An increase in the demand for money causes a shift of the demand for money curve to the right and a movement along the LM curve reflecting a higher interest rate and level of national income.

Accepted Answer

An increase in the demand for money means that people want to hold onto more money, which means they will deposit less money in banks. This will reduce the supply of money, leading to a higher interest rate, which is reflected by a movement along the LM curve. The increase in demand for money will shift the demand for money curve to the right as people want to hold more money at every level of interest rates. This will lead to an increase in the equilibrium interest rates and national income level.

Question 13

On a Keynesian cross diagram, the 45 degree line connects all points where consumption spending would be equal to national income.

Accepted Answer

The 45 degree line represents where national income equals aggregate expenditure (which includes consumption spending, investment, government spending, and net exports), not just consumption spending alone. However, at points where the 45 degree line intersects with the AE curve, consumption spending would indeed be equal to national income.

Question 14

A deflationary gap occurs because
A) Governments set full employment output at too high a level.
B) Prices in the economy are too low to ensure that all resources are fully utilized in the economy.
C) The level of expenditure in an economy is less than that needed to maintain full employment output.
D) Planned spending turns out to equal actual spending above full employment output
E) There are not enough resources in the economy to meet consumption requirements.

Accepted Answer

A deflationary gap occurs when the level of expenditure in an economy is less than that needed to maintain full employment output. This means that there is insufficient demand in the economy, resulting in businesses cutting back on production and employment, and resources being underutilized. Choices A and B are not correct as they suggest that the problem is with full employment output or prices being too low, respectively. Choice D refers to a situation above full employment output, whereas a deflationary gap is a situation below full employment output. Choice E is not relevant to the concept of a deflationary gap.

Question 15

Which of the following statements about the 45 degree line is true?
A) The 45 degree line cuts the vertical axis at the level of autonomous expenditure in the economy.
B) The 45 degree line connects all points where interest rates and national income are equal.
C) The slope of the 45 degree line is determined by the marginal propensity to consume.
D) A steeper 45 degree line indicates an inflationary gap.
E) The 45 degree line connects all points where consumption spending would equal national income.

Accepted Answer

The 45 degree line represents all the possible points where national income (measured on the horizontal axis) equals spending (measured on the vertical axis). At any point on the 45 degree line, total spending (C + I + G + NX) equals total income (Y). Therefore, the correct statement is E: The 45 degree line connects all points where consumption spending would equal national income.

Question 16

If the economy was in equilibrium where an inflationary gap existed then Keynes would argue that governments should cut public spending and increase taxation to reduce the expenditure line to reduce the gap.

Accepted Answer

Keynesian economics argues that during an inflationary gap, the government should reduce public spending and increase taxation to reduce aggregate demand and close the gap.

Question 17

Keynes believed that a key element of unemployment was a deficiency in the level of aggregate demand which governments could and should rectify.

Accepted Answer

This is the core principle of Keynesian economics. Keynes believed that fluctuations in aggregate demand caused business cycles and that government intervention could help stabilize economies during times of downturn.

Question 18

The government increases spending by €10 billion during a time of economic slowdown when output is less than full employment output. The marginal propensity to withdraw is 0.9. What is the value of the multiplier?
A) 0.1
B) 0.9
C) 1.1
D) 10

Accepted Answer

The multiplier can be calculated using the formula: 
Multiplier = 1 / Marginal Propensity to Withdraw

In the given scenario, the marginal propensity to withdraw (MPW) is 0.9. 
Therefore, the multiplier will be: 
Multiplier = 1 / 0.9 = 1.1

Hence, the correct answer is choice C.

Question 19

The IS curve will be flatter the more responsive consumption and investment are to changes in interest rates.

Accepted Answer

This is because if consumption and investment are more responsive to changes in interest rates, a small change in the interest rate will lead to a larger change in GDP, resulting in a flatter IS curve.

Question 20

Planned spending includes the intended or desired spending by households and firms in the economy.

Accepted Answer

Planned spending refers to the intended or desired spending by households and firms on consumption, investment, government purchases, and net exports.

Quiz 32: Keynesian Economics and the Is-Lm Analysis

What was John Maynard Keynes's primary message concerning recessions and depressions?

In the Keynesian cross diagram the 45 degree line

A key element of Keynesian analysis relates to:

Refer to figure 1 below. If the vertical distance labelled Z represents a deflationary gap then which of the following statements is true? Figure 1

If the marginal propensity to consume in the economy is 0.8 and the government increases its spending this year by €10 billion, what will be the additional increase in expenditure in the economy next year?

The LM curve connects points where the money market is in equilibrium and the demand for money is equal to the supply of money at different interest rates.

Which of the following statements about Keynesian views is true?

The multiplier model implies that