Question 1

In an economic downturn, sticky wages and prices reduce the economy's speed of adjustment because
A) businesses are unable to adjust quickly to changes in aggregate demand.
B) they cause deflation.
C) hyperinflation will likely occur.
D) union workers would likely quit and look for work elsewhere.

Accepted Answer

Sticky wages and prices refer to the phenomenon where wages and prices do not decrease immediately in response to a decrease in aggregate demand. This can make it difficult for businesses to adjust their production levels and can prolong the economic downturn. Workers are usually unwilling to accept lower wages, and businesses may be hesitant to lower their prices due to the fear of losing market share to competitors. This all slows down the economy's adjustment process. The other choices (B, C, and D) are incorrect as they do not accurately describe the effects of sticky wages and prices on the economy during an economic downturn.

Question 2

Keynesian economics predicts that if government policy makers deem current equilibrium real Gross Domestic Product (GDP) to be "too low," then an appropriate policy action would be to
A) do nothing, because the economy is self-adjusting.
B) raise government spending, thereby increasing aggregate demand and pushing up real Gross Domestic Product (GDP) with little or no inflationary consequences.
C) increase taxes, thereby causing aggregate demand to increase and inducing a rise in real Gross Domestic Product (GDP) with little or no inflationary consequences.
D) reduce the money stock, thereby causing aggregate demand to decrease and inducing a rise in fall in the price level that generates an increase in total planned expenditures.

Accepted Answer

Keynesian economics highlights that when equilibrium real GDP is too low, government should intervene by increasing its own spending to stimulate aggregate demand as it leads to a multiplier effect on employment and output without significantly affect inflation. Choice A is incorrect because the Keynesian model does not assume an automatic adjustment pathway for the economy. Choice C is erroneous as it would reduce disposable income, causing a fall in demand, not increase it. Option D is also inapt as it proposes to decrease aggregate demand, which would cause a contraction of the economy, not expansion, contradicting the initial premise.

Question 3

Real GDP is ________ determined in the classical model and ________ determined in the Keynesian model.
A) supply; supply
B) supply; demand
C) demand; supply
D) demand; demand

Accepted Answer

In the classical model, real GDP is determined by supply factors such as labor, capital, and technology, assuming that prices are flexible and markets clear. In the Keynesian model, real GDP is determined by aggregate demand, with the assumption that prices and wages can be sticky, leading to periods of unemployment and underutilized resources.

Question 4

In the simple Keynesian portion of the upward sloping short-run aggregate supply curve
A) equilibrium real GDP is demand-determined.
B) equilibrium real GDP is supply-determined.
C) equilibrium real GDP is neither determined by aggregate supply nor by aggregate demand.
D) equilibrium real GDP is determined by both aggregate supply and aggregate demand.

Accepted Answer

In the simple Keynesian portion of the upward sloping short-run aggregate supply curve, equilibrium real GDP is demand-determined. This means that changes in aggregate demand will cause a change in equilibrium GDP, as prices remain fixed in the short-run. Therefore, aggregate demand is the primary determinant of equilibrium real GDP in this portion of the curve.

Question 5

The short-run aggregate supply curve is horizontal when
A) prices are inflexible and the economy is at full employment.
B) there are unemployed resources and prices do not increase when aggregate demand increases.
C) there are unemployed resources and prices do not decrease when aggregate supply increases.
D) there are no unemployed resources and prices do not increase when aggregate demand or supply increases.

Accepted Answer

The short-run aggregate supply curve is horizontal when there are unemployed resources and prices do not increase when aggregate demand increases. This is because firms can increase output without increasing their costs, as they are using unemployed resources, thus leading to an increase in aggregate supply without an increase in prices.

Question 6

In the Keynesian model, to understand the determination of income and employment it is necessary to understand
A) how aggregate supply is determined.
B) how aggregate demand is determined.
C) how long-run aggregate supply is determined.
D) how interest rates are determined.

Accepted Answer

The Keynesian model emphasizes the importance of aggregate demand in determining income and employment levels in the short run. This is because in the short run, prices are assumed to be relatively sticky and do not adjust quickly to changes in supply and demand. As a result, changes in aggregate demand (via changes in government spending, investment, or exports/imports) will have a direct effect on output and employment levels. Therefore, understanding how aggregate demand is determined is crucial in the Keynesian model.

Question 7

According to Keynes, once a system attains an economy-wide equilibrium
A) there may or may not be excess productive capacity.
B) planned consumption will be zero.
C) planned investment will be zero.
D) the economy will be at full productive capacity.

Accepted Answer

According to Keynes, achieving economy-wide equilibrium does not necessarily mean that the economy is operating at full productive capacity. There may still be excess productive capacity, meaning that firms are not producing at their full potential. Therefore, option A is the best choice. Option B and C are incorrect as they suggest that consumption and investment will be zero, which is not necessarily true in an equilibrium situation. Option D is incorrect as it incorrectly assumes that the economy will be at full productive capacity once equilibrium is achieved.

Question 8

The simple Keynesian model assumes that
A) gross private domestic investment exceeds net investment by the capital consumption allowance.
B) prices, especially the price of wages, are "sticky downward."
C) there will never be any excess capacity in the short run.
D) aggregate demand will always equal aggregate supply.

Accepted Answer

The simple Keynesian model assumes that prices, especially the price of wages, are "sticky downward" which means they do not adjust quickly to changes in demand or supply. This assumption is the key factor in determining the level of economic output and employment in the short run. The other options (A, C, and D) are not assumptions of the simple Keynesian model.

Question 9

In the short run, an increase in the price level induces firms to expand production because
A) prices of inputs are held constant, so the higher prices for firms' products imply that it is profitable to expand production.
B) each firm must keep its production level up to the level of its rivals, and some firms will expand production as the price level increases.
C) higher prices allow firms to hire more inputs by offering higher prices for inputs, which increases productivity and profits.
D) they can increase profits by increasing maintenance costs.

Accepted Answer

In the short run, the cost of inputs remains constant, so increasing the price level will increase the profitability of firms' products. Therefore, firms will expand production to take advantage of the higher prices and increase their profits. Option B is incorrect because there is no obligation for firms to keep up with their rivals, and even if there was, it doesn't explain why they would expand production. Option C is incorrect because firms hiring more inputs would increase input costs, not profits, which conflicts with the initial assumption that input costs are constant. Option D is incorrect because increasing maintenance costs does not necessarily lead to an increase in production.

Question 10

-Refer to the above figure. The classical aggregate supply curve is represented by ________ and the Keynesian short-run aggregate supply curve is represented by ________.
A) curve 2; curve 1
B) curve 2; curve 3
C) curve 3; curve 4
D) curve 2; curve 4

Accepted Answer

The classical aggregate supply curve is represented by curve 2, which is vertical, indicating that the total output is not influenced by the price level in the long run. The Keynesian short-run aggregate supply curve is represented by curve 4, which is horizontal at low levels of output, indicating that prices do not increase as demand increases when there is slack in the economy.

Question 11

The relationship between the price level and the real Gross Domestic Product (GDP) without full adjustment or full information is represented by
A) the long-run aggregate supply curve.
B) the short-run aggregate supply curve.
C) the aggregate demand curve.
D) the distance between the long-run aggregate supply curve and the short-run aggregate supply curve.

Accepted Answer

The relationship between the price level and the real GDP without full adjustment or full information is represented by the short-run aggregate supply curve. The short-run aggregate supply curve shows the relationship between the price level and the quantity of output that firms are willing to supply in the short run, taking into account production costs, including adjustments to inputs such as wages and raw material prices, but not taking into account changes in capital or technology.

Question 12

A key component of the Keynesian model is that
A) prices are sticky.
B) prices are flexible.
C) wages are flexible.
D) people are not fooled by money illusion.

Accepted Answer

The Keynesian model assumes that prices are sticky, meaning that they do not adjust quickly to changes in supply and demand. This leads to short-term fluctuations in output and employment, with the government's role being to stabilize the economy through fiscal and monetary policy.

Question 13

Which of the following is a TRUE statement?
A) A decrease in aggregate demand was not possible according to the classical economists but was possible according to Keynes.
B) A decrease in aggregate demand has no short-run effects according to the classical economists but had significant effects according to Keynes.
C) Classical economists believed real GDP adjusted more than prices when aggregate demand fell, while Keynes argued that prices adjusted more than output.
D) Classical economists believed price adjusted more than output when aggregate demand fell, while Keynes argued real GDP adjusted more than prices.

Accepted Answer

Classical economists believed that prices would adjust downwards to clear the market when aggregate demand fell, while Keynes argued that reducing output and employment was a more likely response. Therefore, classical economists believed that price adjusted more than output, while Keynes argued that real GDP adjusted more than prices.

Question 14

Keynes suggested that the short-run aggregate supply (SRAS) curve
A) is vertical.
B) is horizontal.
C) slopes downward.
D) slopes upward.

Accepted Answer

Keynes suggested that the short-run aggregate supply (SRAS) curve is horizontal, indicating that firms will supply whatever amount of goods is demanded at the current price level, especially under conditions of high unemployment and idle capacity.

Question 15

The Keynesian portion of the short-run aggregate supply (SRAS) curve
A) is horizontal.
B) is vertical.
C) slopes upward.
D) slopes downward.

Accepted Answer

The Keynesian portion of the short-run aggregate supply (SRAS) curve is horizontal, indicating that firms will supply whatever amount of goods is demanded at the current price level, assuming there is slack in the economy.

Question 16

The short-run aggregate supply (SRAS) curve represents the relationship between
A) the price level and the real Gross Domestic Product (GDP) without full adjustment or full information.
B) the price level and the real Gross Domestic Product (GDP) without full adjustment but with full information.
C) the price level and the nominal Gross Domestic Product (GDP).
D) the decisions of producers and the decisions of consumers.

Accepted Answer

The SRAS curve represents the relationship between the price level and the real Gross Domestic Product (GDP) without full adjustment or full information. This means that in the short run, the level of output produced by firms can be influenced by changes in the price level, without all input and output markets adjusting to their long-run equilibrium positions. This can lead to temporary deviations from potential output and fluctuations in the economy.

Question 17

The Keynesian portion of the short-run aggregate supply (SRAS) curve implies
A) an upward slope.
B) the price level does not change.
C) a downward slope.
D) flexible prices and wages.

Accepted Answer

The Keynesian portion of the SRAS curve is horizontal, indicating that the price level does not change while output can increase.

Question 18

According to Keynes, wages are inflexible because
A) of the minimum wage set by government.
B) of long-term contracts.
C) workers do not behave in their own self-interest.
D) workers are not rational.

Accepted Answer

Keynes believed that wages are inflexible due to long-term contracts between employers and employees, which make it difficult to adjust wages quickly in response to changes in the economy. He also believed that workers may resist nominal wage cuts even when it is in their best interest to do so, due to factors such as social norms and the fear of reducing their standard of living. However, neither A, C, nor D are accurate explanations for Keynes' view on wage inflexibility.

Question 19

According to Keynes, the classical model could not explain
A) a recession or depression.
B) periods of rising unemployment.
C) a long-term economic decline.
D) periods of rising interest rates.

Accepted Answer

The answer of According to Keynes, the classical model could...

Question 20

The Keynesian short-run aggregate supply (SRAS) curve
A) shows that real Gross Domestic Product (GDP) will increase only if the price level increases.
B) assumes a full-employment level of real Gross Domestic Product (GDP).
C) is horizontal.
D) does not reflect any changes in nominal Gross Domestic Product (GDP).

Accepted Answer

The Keynesian SRAS curve is horizontal, meaning that changes in the price level do not impact the level of real GDP produced in the short-run. This is because, according to Keynesian theory, there are unemployed resources in the economy that can be utilized to increase output without increasing prices.

Quiz 11: Classical and Keynesian Macro Analyses

In an economic downturn, sticky wages and prices reduce the economy's speed of adjustment because

Keynesian economics predicts that if government policy makers deem current equilibrium real Gross Domestic Product (GDP) to be "too low," then an appropriate policy action would be to

Real GDP is determined in the classical model and determined in the Keynesian model.

In the simple Keynesian portion of the upward sloping short-run aggregate supply curve

The short-run aggregate supply curve is horizontal when

In the Keynesian model, to understand the determination of income and employment it is necessary to understand

According to Keynes, once a system attains an economy-wide equilibrium

The simple Keynesian model assumes that

In the short run, an increase in the price level induces firms to expand production because

-Refer to the above figure. The classical aggregate supply curve is represented by and the Keynesian short-run aggregate supply curve is represented by .

The relationship between the price level and the real Gross Domestic Product (GDP) without full adjustment or full information is represented by

A key component of the Keynesian model is that

Which of the following is a TRUE statement?

Keynes suggested that the short-run aggregate supply (SRAS) curve

The Keynesian portion of the short-run aggregate supply (SRAS) curve

The short-run aggregate supply (SRAS) curve represents the relationship between

The Keynesian portion of the short-run aggregate supply (SRAS) curve implies

According to Keynes, wages are inflexible because

According to Keynes, the classical model could not explain

The Keynesian short-run aggregate supply (SRAS) curve