Question 1

Within the Keynesian model,if the output of an economy is less than the full-employment level,then
A)a reduction in government expenditures will direct the economy back to full-employment equilibrium.
B)a reduction in wage rates and resource prices will quickly restore full-employment equilibrium.
C)a reduction in the real interest rate will soon restore full-employment equilibrium.
D)output will tend to remain below full-employment capacity unless aggregate expenditures increase.

Accepted Answer

Within the Keynesian model, if the output of an economy is below the full-employment level, a reduction in government expenditures or wage rates and resource prices will not swiftly restore the economy to full-employment equilibrium. Instead, output will tend to remain below full-employment capacity unless there is an increase in aggregate expenditures. Therefore, choice D is the best answer.

Question 2

The Keynesian model provided an explanation for
A)the prolonged unemployment of the 1930s.
B)the double-digit inflation rates of the 1970s.
C)the high unemployment rates of the 1970s.
D)the high inflation rates of the 1930s.

Accepted Answer

The Keynesian model provided an explanation for the prolonged unemployment of the 1930s.

Question 3

According to the Keynesian view,the prolonged unemployment of the Great Depression
A)was surprising because Keynesians believed that wage rates would decline and direct the economy to full employment.
B)was surprising because Keynesians believed that lower interest rates would direct the economy to full employment.
C)resulted because the total expenditures on goods and services were less than the full-employment rate of output.
D)resulted because the federal government ran large budget deficits during the 1930s.

Accepted Answer

According to the Keynesian view, prolonged unemployment during the Great Depression resulted because the total expenditures on goods and services were less than the full-employment rate of output. This means that there was a deficiency in aggregate demand, which led to reduced production and higher unemployment. Keynes believed that the government could offset this deficiency through fiscal policy measures like increasing government spending and cutting taxes. Wage rates and interest rates were not the primary drivers of unemployment in the Keynesian view.

Question 4

Within the framework of the Keynesian model,
A)changes in output rather than changes in prices direct the economy to equilibrium.
B)changes in prices rather than changes in output direct the economy to equilibrium.
C)changes in interest rates and resource prices will direct the economy to equilibrium.
D)the economy will continually be in equilibrium.

Accepted Answer

In the Keynesian model, changes in output (measured by GDP) are the primary driver of changes in employment and income, which in turn affects consumer spending and investment. Therefore, changes in output are necessary to reach equilibrium in the economy, rather than changes in prices.

Question 5

The Great Depression provided support for Keynes' view that
A)government action was necessary to ensure interest rates remained at the equilibrium level.
B)prolonged periods of unemployment would be present when demand is deficient.
C)falling resource prices would bring the economy out of a recession.
D)lower interest rates would quickly restore the full employment equilibrium of an economy.

Accepted Answer

The Great Depression was a period of prolonged and severe unemployment which supported Keynes' view that demand deficiency can lead to extended periods of joblessness. This led to his belief that government intervention was necessary to stimulate demand and bring the economy back to full employment equilibrium. The other options do not align with Keynes' beliefs or the realities of the Great Depression.

Question 6

Which of the following would a Keynesian economist be most likely to stress?
A)Supply creates its own demand.
B)Businesses will not produce goods and services if they do not think people will buy them.
C)You cannot spend your way out of a recession.
D)When the unemployment rate is high,wage rates will fall.
E)A dollar saved is a dollar earned;a high rate of saving is the key to prosperity.

Accepted Answer

A Keynesian economist would emphasize the importance of consumer demand in driving economic growth. Therefore, they would stress that businesses will only produce goods and services if they believe that people will buy them, as stated in choice B. Choices A, C, D, and E go against the basic principles of Keynesian economics.

Question 7

The 1930s were a period of
A)strong economic expansion and rapid growth of real output.
B)high rates of inflation coupled with a low rate of unemployment.
C)depressed economic conditions and prolonged high rates of unemployment.
D)strong growth of real output even though the general level of prices was declining.

Accepted Answer

The 1930s were marked by the Great Depression, which created depressed economic conditions and prolonged high rates of unemployment. This is evidenced by high levels of poverty, bank failures, and a decline in industrial production during this time period.

Question 8

Which of the following is a problem with discretionary fiscal policy as an economic stabilization tool?
A)Discretionary changes in fiscal policy can be easily anticipated by private decision makers.
B)It is difficult to properly time discretionary changes in fiscal policy.
C)Discretionary fiscal policy is only effective during a recession.
D)Discretionary fiscal policy is only effective during an economic boom.

Accepted Answer

It is difficult to properly time discretionary changes in fiscal policy. Discretionary fiscal policy requires the government to accurately predict the timing and magnitude of economic changes, and make corresponding policy adjustments. This is difficult to achieve in practice, as there is often a lag in the availability of relevant economic data, and even when data is available, it can be difficult to interpret and predict future economic trends. As a result, discretionary fiscal policy often suffers from timing lags, which can lead to ineffective or even counterproductive policy outcomes.

Question 9

Within the framework of the Keynesian model,if spending is abnormally low,
A)the economy will be in equilibrium at full employment,but inflation will be high.
B)equilibrium output will be less than the full-employment rate of output.
C)the equilibrium output rate will exceed the economy's full-employment capacity.
D)the actual rate of unemployment will be less than the natural rate of unemployment.

Accepted Answer

According to the Keynesian model, if spending is abnormally low, there will be a deficiency in aggregate demand, leading to a situation where equilibrium output will be less than the full-employment rate of output. This is because lower spending results in lower production levels, leading to lower employment, lower incomes, and ultimately lower spending. As a result, the economy will operate at a level of output that is below its potential, resulting in a recessionary gap. Therefore, option B is the correct choice. The other options are incorrect because low spending is associated with low inflation, and the actual rate of unemployment would be higher than the natural rate if there is a recessionary gap.

Question 10

Rather than seeking to balance the budget,Keynesian economists argue that the government's tax and spending policies should be determined by the
A)demand for government-provided public goods.
B)level of aggregate demand required to achieve full employment of resources.
C)size and quality of the labor force.
D)need to expand or contract the supply of money.

Accepted Answer

Keynesian economics emphasizes the importance of government intervention in the economy to achieve full employment and stabilize the business cycle. Therefore, Keynesian economists argue that the government's tax and spending policies should be determined by the level of aggregate demand required to achieve full employment of resources. This means that the government should use fiscal policy to stimulate demand in a recessionary economy and to cool down demand in an inflationary economy. Balancing the budget is not the primary concern for Keynesian economics.

Question 11

Keynes rejected the view that lower wages would direct a recessionary economy back to full employment because
A)lower wages would cause the central bank to reduce the money supply and thereby prolong the recession.
B)lower wages would stimulate inflation and thereby prolong the recession.
C)market forces would quickly direct an economy back to full employment.
D)powerful trade unions and large corporations made wages highly inflexible.

Accepted Answer

Keynes believed that wages were highly inflexible due to the power of trade unions and large corporations, and therefore, a reduction in wages would not necessarily lead to increased employment. Instead, he advocated for government intervention to stimulate aggregate demand and promote economic growth.

Question 12

If an economy were experiencing a high rate of unemployment as the result of weak aggregate demand,a Keynesian economist would be most likely to recommend
A)a reduction in taxes coupled with a reduction in government expenditures of equal size.
B)an increase in government expenditures coupled with an increase in taxes of equal size.
C)a reduction in taxes,without any offsetting reduction in government expenditures.
D)maintenance of a balanced budget.

Accepted Answer

The answer of If an economy were experiencing a high...

Question 13

When Keynesian equilibrium is present,
A)aggregate demand for goods and services will equal the current rate of output.
B)business inventories will be increasing.
C)full employment must be present.
D)the actual rate of unemployment must equal the natural rate of unemployment.

Accepted Answer

Keynesian equilibrium occurs when aggregate demand (total spending on goods and services) equals current output. This means that there is no excess demand (which would lead to inflation) or excess supply (which would lead to recession). Therefore, choice A is the correct answer. Business inventories do not necessarily have to be increasing, and full employment or the natural rate of unemployment are not requirements for a Keynesian equilibrium.

Question 14

Prior to the Great Depression,most economists believed that a recessionary downturn would be reversed by
A)higher wages that would stimulate aggregate demand and reduce unemployment.
B)lower wages that would increase the quantity of labor demanded and reduce unemployment.
C)an expansionary monetary policy on the part of the Federal Reserve System.
D)an increase in government spending that would stimulate aggregate demand and employment.

Accepted Answer

Prior to the Great Depression, most economists believed in the classical economic theory, which suggested that wages and prices were flexible and would adjust to market conditions, including a recessionary downturn. In this view, lower wages would increase the quantity of labor demanded and lead to a reduction in unemployment, eventually leading to a recovery. This belief was challenged by the severity and length of the Great Depression, which showed that the classic theory was inadequate to explain and address such a crisis.

Question 15

Which of the following is an important insight of Keynesian analysis?
A)When an economy is in a recession,lower interest rates and lower wage rates will quickly direct the economy back to full employment.
B)When widespread unemployment is present,increases in aggregate demand will exert a larger impact on real output than when the economy is operating at or near full employment.
C)When an economy is in a recession,it makes sense to increase taxes and reduce government expenditures.
D)A balanced budget is the key to maintenance of full employment.

Accepted Answer

The important insight of Keynesian analysis is that when there is widespread unemployment, increases in aggregate demand will result in a larger impact on real output than when the economy is operating at or near full employment. This is because during a recession, there are many idle resources (labor, capital) that can be utilized to increase output, whereas at full employment, there is little room to expand output. Lowering interest rates and wage rates may help stimulate the economy, but it may not be sufficient to fully address the issue of unemployment. Choices A, C, and D are incorrect as they do not represent the fundamental principles of Keynesian analysis.

Question 16

Keynesian economists believed that the prolonged unemployment of the 1930s was the result of
A)the sharp reduction in the supply of money during 1929-1933 and another monetary contraction in 1938.
B)the high interest rates of the 1930s.
C)the double-digit inflation of the 1930s.
D)insufficient aggregate demand and the failure of market forces to direct the economy back to full employment.

Accepted Answer

Keynesian economists believed that the prolonged unemployment of the 1930s was due to insufficient aggregate demand and the failure of market forces to direct the economy back to full employment. According to Keynesian theory, government intervention in the form of increased spending and monetary policy could stimulate demand and reduce unemployment.

Question 17

A major advantage of built-in or automatic stabilizers is that they
A)guarantee the federal budget will be balanced over the course of the business cycle.
B)require no Congressional action to be effective.
C)automatically produce surpluses during recessions and deficits during inflation.
D)require discretionary actions on the part of Congress before they exert an impact on output and employment.

Accepted Answer

Built-in or automatic stabilizers are built into the fiscal system and do not require any Congressional action or intervention to be effective. For example, during a recession, tax revenue automatically decreases as people earn less income and pay fewer taxes, while government spending on unemployment benefits automatically increases. This helps to stabilize the economy without the need for discretionary action from Congress.

Question 18

Prior to the time of John Maynard Keynes,most economists stressed that
A)low levels of aggregate demand would lead to prolonged periods of unemployment.
B)market economies were inherently unstable because of fluctuating aggregate demand.
C)market adjustments would automatically direct an economy to full employment within a relatively brief period of time.
D)budget deficits and surpluses were necessary for the control of economic fluctuations.

Accepted Answer

Prior to the time of John Maynard Keynes, most economists subscribed to the classical theory of economics, which stated that market adjustments would automatically direct an economy to full employment within a relatively brief period of time. This theory did not account for the possibility of prolonged periods of unemployment resulting from low levels of aggregate demand. It was only with Keynes' introduction of the concept of aggregate demand and the need for government intervention to stimulate demand during times of recession that the classical theory began to be challenged.

Question 19

The multiplier principle indicates that if business decision makers become more optimistic about the future and,as a result,increase their investment expenditures by $50 billion,real GDP
A)will increase by less than $50 billion if the economy was initially operating well below capacity.
B)will increase by more than $50 billion if the economy was initially operating well below capacity.
C)will increase by more than $50 billion if the economy was initially operating at full-employment capacity.
D)will decline if the marginal propensity to consume is less than 1.

Accepted Answer

The multiplier principle suggests that an initial increase in investment spending can lead to subsequent rounds of spending as new income is generated. The size of the multiplier effect depends on the marginal propensity to consume (MPC), with a larger MPC creating a larger multiplier effect. If the economy was initially operating well below capacity, then there is likely to be more idle resources that can be utilized, which could lead to an even larger increase in real GDP. Therefore, if business decision makers increase investment expenditures by $50 billion, it is likely to lead to a larger increase in real GDP if the economy is operating below capacity.

Question 20

In the Keynesian view,equilibrium takes place when
A)the real and nominal interest rates are equal.
B)the level of total spending in the economy is equal to current output.
C)current output is equal to the economy's long-run potential.
D)the money supply is growing at a constant rate.

Accepted Answer

According to Keynesian economics, equilibrium occurs when the level of total spending or aggregate demand in the economy is equal to current output or aggregate supply. This is because, in the short run, prices and wages are sticky, meaning they do not adjust to changes in demand or supply quickly enough to restore equilibrium. As a result, changes in spending can lead to temporary output gaps, either above or below the economy's long-run potential, which can be addressed through government intervention such as fiscal or monetary policy. Real and nominal interest rates may be relevant for economic growth and inflation, but they do not necessarily determine equilibrium in the Keynesian model. The growth rate of the money supply is also important, but it may not be sufficient to ensure equilibrium if spending or output is out of balance.

Quiz 11: Fiscal Policy: the Keynesian View and Historical Perspective

Within the Keynesian model,if the output of an economy is less than the full-employment level,then

The Keynesian model provided an explanation for

According to the Keynesian view,the prolonged unemployment of the Great Depression

Within the framework of the Keynesian model,

The Great Depression provided support for Keynes' view that

Which of the following would a Keynesian economist be most likely to stress?

The 1930s were a period of

Which of the following is a problem with discretionary fiscal policy as an economic stabilization tool?

Within the framework of the Keynesian model,if spending is abnormally low,

Rather than seeking to balance the budget,Keynesian economists argue that the government's tax and spending policies should be determined by the

Keynes rejected the view that lower wages would direct a recessionary economy back to full employment because

If an economy were experiencing a high rate of unemployment as the result of weak aggregate demand,a Keynesian economist would be most likely to recommend

When Keynesian equilibrium is present,

Prior to the Great Depression,most economists believed that a recessionary downturn would be reversed by

Which of the following is an important insight of Keynesian analysis?

Keynesian economists believed that the prolonged unemployment of the 1930s was the result of

A major advantage of built-in or automatic stabilizers is that they

Prior to the time of John Maynard Keynes,most economists stressed that

The multiplier principle indicates that if business decision makers become more optimistic about the future and,as a result,increase their investment expenditures by $50 billion,real GDP

In the Keynesian view,equilibrium takes place when