Question 1

The short-run aggregate supply curve is horizontal if
A) resources were fully utilized.
B) there are unutilized resources in the economy.
C) resources are perfectly adaptable between production processes.
D) there are high inflation rates.

Accepted Answer

The short-run aggregate supply curve is horizontal when there are unutilized resources in the economy, indicating that increases in demand can lead to increases in output without leading to higher prices. This is because the economy can increase production using these unutilized resources without the need to increase prices.

Question 2

Which of the of the following is a basic difference between the classical model and the Keynesian model in which the Keynesian short-run aggregate supply curve exists?
A) The classical model assumes that the long run aggregate supply curve is vertical, while the Keynesian model assumes the long run aggregate supply curve is horizontal.
B) The classical model assumes that the position of the long run aggregate supply curve is determined by full employment, while the Keynesian model assumes that the long run aggregate supply curve will be to the left of full employment.
C) The classical model assumes that the level of real GDP is supply determined, while the Keynesian model assumes that it is demand determined.
D) The classical model uses real GDP, while the Keynesian model uses nominal GDP.

Accepted Answer

The classical model posits that real GDP is determined by supply factors like labor and capital, while the Keynesian model suggests that in the short run, real GDP is influenced by aggregate demand.

Question 3

The Keynesian short-run aggregate supply curve
A) is horizontal.
B) is vertical.
C) reflects the fact that real GDP is supply-determined.
D) reflects the fact that real GDP does not vary with changes in aggregate demand.

Accepted Answer

The Keynesian short-run aggregate supply curve is horizontal because it reflects the idea that in the short run, changes in aggregate demand can lead to changes in output and employment without causing significant changes in the price level. This reflects the Keynesian view that there can be involuntary unemployment in the short run due to insufficient aggregate demand, and that government intervention may be necessary to stimulate demand and increase output and employment.

Question 4

Keynes argued that because of sticky prices and wages,
A) the short-run aggregate supply curve could be horizontal.
B) the short-run aggregate supply curve is probably vertical.
C) the long-run aggregate supply curve slopes downward.
D) the aggregate demand curve is vertical.

Accepted Answer

Keynes argued that prices and wages are sticky in the short-run, meaning they do not easily adjust to changes in economic conditions. This leads to a situation where the short-run aggregate supply curve can be horizontal, because changes in aggregate demand will not result in corresponding changes in prices and wages in the short run.

Question 5

Which one of the following statements is true?
A) The classical model cannot explain periods of prolonged unemployment.
B) The Keynesian model cannot explain periods of prolonged unemployment.
C) The Keynesian model assumes complete flexibility of wages and prices.
D) The Keynesian model shows that the level of real GDP is supply-determined.

Accepted Answer

The classical model assumes that markets will adjust quickly to any shocks, including changes in labor supply or demand. However, empirical evidence shows that periods of prolonged unemployment can occur, which the classical model cannot explain. The Keynesian model, on the other hand, can explain such periods through the notion of sticky wages and prices. Option B is incorrect because the Keynesian model was actually developed to explain periods of prolonged unemployment. Option C is incorrect because the Keynesian model assumes that wages and prices are sticky, not flexible. Option D is incorrect because the Keynesian model shows that the level of real GDP is demand-determined, not supply-determined.

Question 6

Which one of the following statements is true?
A) The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that domestic workers are harmed by imports.
B) The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that there is no correlation between the level of real GDP and the employment level.
C) The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that increases in aggregate demand can boost output in the short term.
D) The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that increases in aggregate demand will increase the price level, but will leave real GDP unaffected in the short term.

Accepted Answer

The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that increases in aggregate demand can boost output in the short term. This means that as aggregate demand increases, firms will be able to increase their production and output, resulting in an increase in overall real GDP. This relationship only holds in the short run, however, as in the long run, wages and prices are able to adjust, and so the aggregate supply curve becomes vertical.

Question 7

The Keynesian short-run aggregate supply curve is demonstrated graphically as a
A) vertical line.
B) horizontal line.
C) upward sloping curve.
D) downward sloping curve.

Accepted Answer

The Keynesian short-run aggregate supply curve is depicted as a horizontal line, indicating that prices do not change as demand increases or decreases in the short run.

Question 8

The Keynesian short-run aggregate supply curve is horizontal because
A) it represents the full employment level of real GDP.
B) it reflects the absence of money illusion.
C) it reflects wage and price inflexibility.
D) it represents Say's law.

Accepted Answer

The Keynesian short-run aggregate supply curve is horizontal because it reflects wage and price inflexibility, meaning that in the short run, prices and wages do not adjust quickly to changes in demand, allowing for increases in aggregate demand to affect output without changing the price level.

Question 9

To explain the existence of excess capacity, Keynes argued that
A) prices and wages are flexible, and eventually markets would go back to equilibrium.
B) the long run average cost curve should not occur at the full employment level.
C) the aggregate demand curve can be manipulated by advertising.
D) prices and wages are inflexible in the downward direction.

Accepted Answer

Keynes argued that excess capacity exists because prices and wages are inflexible in the downward direction, preventing markets from clearing.

Question 10

If the economy is operating at a point at which short-run aggregate supply is horizontal, then
A) real GDP cannot expand.
B) real GDP cannot contract.
C) increases in aggregate demand do not increase the price level.
D) then increases in aggregate demand do not increase real GDP.

Accepted Answer

When short-run aggregate supply is horizontal, it means that the economy is operating at full capacity and any increase in aggregate demand will lead to an increase in real GDP without any increase in the price level. Therefore, increases in aggregate demand do not increase the price level, making option C the correct answer. Options A and B are incorrect because real GDP can still expand or contract within the limits of the horizontal SRAS curve. Option D is also incorrect since an increase in aggregate demand will increase real GDP without causing inflation.

Question 11

In the Keynesian model in which the Keynesian short-run aggregate supply curve exists,
A) the short-run aggregate supply curve determines real GDP.
B) the aggregate demand curve determines the price level.
C) unemployment cannot persist for long periods of time.
D) aggregate demand determines real GDP per year.

Accepted Answer

In the Keynesian model, the short-run aggregate supply curve is typically horizontal at low levels of output, indicating that prices do not change as demand increases or decreases. This means that the level of real GDP (or output) per year is determined by the level of aggregate demand, not by the supply curve. This is because, in the short run, firms are willing to produce more at the same price level if demand increases.

Question 12

The approach to understanding the determination of real GDP and the price level that emphasizes incomplete adjustment in the prices of many goods is
A) the classical model.
B) the Keynesian model.
C) Say's Law.
D) the aggregate demand model.

Accepted Answer

The approach that emphasizes incomplete adjustment in the prices of many goods is the sticky price model, which is a key feature of the Keynesian model. The classical model assumes immediate price adjustment, Say's Law relates to the supply of goods creating their own demand, and the aggregate demand model takes into account the effects of changes in aggregate demand on real GDP and the price level.

Question 13

Q: How many economists does it take to change a light bulb? A: All. Because then you will generate employment, more consumption, moving the aggregate demand curve to the right.
This joke represents the view of
A) classical economists.
B) Keynesian economists.
C) economists who contend that money illusion never occurs.
D) economists who conclude that wages and prices are very flexible.

Accepted Answer

This joke reflects the perspective of Keynesian economists who argue that government intervention and increased spending can boost aggregate demand and stimulate economic growth.

Question 14

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 believe that equilibrium real GDP is determined by aggregate demand, which means that government policies can be used to stimulate or depress aggregate demand in order to achieve full employment and economic stability. They do not believe that equilibrium real GDP is solely determined by supply-side factors such as technology or natural resources. They also do not believe that reaching equilibrium real GDP always leads to inflation, as they believe that there can be idle resources and slack in the economy that can be used to increase production without generating inflationary pressures.

Question 15

In the Keynesian model which includes the Keynesian short-run aggregate supply curve,
A) an increase in aggregate demand would causes the price level to rise, but does not change the level of real GDP.
B) an increase in aggregate demand causes real GDP to rise without changing the price level.
C) an increase in aggregate demand changes neither the price level nor the level of real GDP.
D) an increase in aggregate demand causes real GDP and the price level to decrease.

Accepted Answer

In the Keynesian model, an increase in aggregate demand causes real GDP to rise without changing the price level in the short-run because firms are able to increase production by using existing resources rather than hiring new workers or purchasing new capital. This is represented by a flat Keynesian short-run aggregate supply curve.

Question 16

The Keynesian contention that the short-run aggregate supply curve is horizontal is based on the assumption that there are
A) sticky prices.
B) flexible prices.
C) real prices.
D) upward sloping prices.

Accepted Answer

The Keynesian theory assumes that prices are sticky in the short run, meaning that they do not adjust immediately to changes in demand or supply. This leads to a horizontal short-run aggregate supply curve, as changes in aggregate demand will lead to changes in output rather than changes in prices.

Question 17

According to Keynes,
A) the short-run aggregate supply curve is vertical.
B) nominal wages and/or prices are sticky.
C) money illusion does not exist.
D) markets are perfectly competitive

Accepted Answer

Keynes believed that nominal wages and/or prices are sticky in the short run, meaning they do not adjust immediately to changes in demand or supply. This is why he advocated for government intervention through fiscal policy to stimulate demand and reduce unemployment during economic downturns. The short-run aggregate supply curve in Keynesian economics is upward sloping, reflecting the idea that firms are willing to increase production as prices rise due to sticky wages and prices. Money illusion, or the tendency for individuals to mistake changes in nominal prices for changes in real prices, is a phenomenon that Keynes acknowledged but did not fully reject as he believed it could play a role in explaining economic behavior in the short run. While Keynes did acknowledge imperfect competition in markets, he did not necessarily assume perfectly competitive markets in his analysis.

Question 18

Why is persistent unemployment a possibility in the Keynesian model but NOT in the classical model?
A) The Keynesian model assumes that people work for motives other than those of earning an income for themselves and supporting a family.
B) The Keynesian model assumes that nominal wages are inflexible downward.
C) The Keynesian model assumes that the level of real GDP is inflexible.
D) The Keynesian model assumes that workers can lose their jobs to foreign competition during economic downturns.

Accepted Answer

The Keynesian model assumes that nominal wages are inflexible downward, meaning that they cannot adjust downwards easily during a recession to reflect the decreased demand for labor. As a result, when there is a decrease in aggregate demand, firms may not be able to lower wages enough to maintain employment levels, leading to persistent unemployment. In contrast, the classical model assumes that wages are flexible and will adjust downward in response to changes in demand, meaning that unemployment is only a temporary phenomenon in the long run.

Question 19

Which one of the following statements is true?
A) The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the classical model.
B) The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the Keynesian model.
C) The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the idea that increases in aggregate demand will increase the price level but will leave real GDP unchanged.
D) The actual behavior of prices and real GDP during the decade of the 1930s is consistent with a vertical short-run aggregate supply curve.

Accepted Answer

The actual behavior of prices and real GDP during the decade of the 1930s is inconsistent with the classical model, which predicts that prices and wages would adjust downwards to restore full employment. Instead, prices and wages remained sticky, and real GDP remained far below potential. This is consistent with the Keynesian model, which argues that in periods of recession or depression, the economy can remain stuck in a low equilibrium with persistent unemployment unless government intervention is used to increase aggregate demand.

Question 20

The short-run aggregate supply curve is a relationship between
A) unemployment and real GDP.
B) inflation and time.
C) real GDP and price level.
D) capital goods and consumer goods.

Accepted Answer

The short-run aggregate supply curve is a relationship between the price level and the quantity of real GDP that firms are willing and able to supply in the short run. It is upward sloping, indicating that as the price level increases, firms will supply a greater quantity of output to the market. Unemployment and capital goods are not directly related to the short-run aggregate supply curve, and while inflation may have an impact, it is not the primary focus of the curve.

Quiz 11: Classical and Keynesian Macro Analyses

The short-run aggregate supply curve is horizontal if

Which of the of the following is a basic difference between the classical model and the Keynesian model in which the Keynesian short-run aggregate supply curve exists?

The Keynesian short-run aggregate supply curve

Keynes argued that because of sticky prices and wages,

Which one of the following statements is true?

Which one of the following statements is true?

The Keynesian short-run aggregate supply curve is demonstrated graphically as a

The Keynesian short-run aggregate supply curve is horizontal because

To explain the existence of excess capacity, Keynes argued that

If the economy is operating at a point at which short-run aggregate supply is horizontal, then

In the Keynesian model in which the Keynesian short-run aggregate supply curve exists,

The approach to understanding the determination of real GDP and the price level that emphasizes incomplete adjustment in the prices of many goods is

Q: How many economists does it take to change a light bulb? A: All. Because then you will generate employment, more consumption, moving the aggregate demand curve to the right. This joke represents the view of

Keynesian economists argue that

In the Keynesian model which includes the Keynesian short-run aggregate supply curve,

The Keynesian contention that the short-run aggregate supply curve is horizontal is based on the assumption that there are

According to Keynes,

Why is persistent unemployment a possibility in the Keynesian model but NOT in the classical model?

Which one of the following statements is true?

The short-run aggregate supply curve is a relationship between