Question 1

Keynes argued that
A) irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment.
B) irrational waves of optimism cause decreases in aggregate demand and decreases in aggregate supply.
C) changes in business and consumer expectations generally stabilize the economy.
D) All of the above are correct.

Accepted Answer

Keynes argued that irrational waves of pessimism lead to decreases in aggregate demand and increases in unemployment. He believed that changes in business and consumer expectations can have a significant impact on the economy and stability, but did not argue that they necessarily stabilize the economy. Option B is incorrect as Keynes did not argue that optimism leads to a decrease in aggregate demand and supply. Option D is incorrect as only option A is correct.

Question 2

When taxes increase, the interest rate
A) increases, making the change in aggregate demand larger.
B) increases, making the change in aggregate demand smaller
C) decreases, making the change in aggregate demand larger.
D) decreases, making the change in aggregate demand smaller.

Accepted Answer

The answer of When taxes increase, the interest rate
A) increases,...

Question 3

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?
A) MPC = 1/2, and the effects of the increase in taxes is 1/2 as strong as the change in government expenditures.
B) MPC = 2/3, and the effects of the increase in taxes is 2/3 as strong as the change in government expenditures
C) MPC = 3/4, and the effects of the increase in taxes is 3/4 as strong as the change in government expenditures
D) All of the above are correct.

Accepted Answer

The answer of The government increases both its expenditures and...

Question 4

In the early 1960s, the Kennedy administration made considerable use of
A) fiscal policy to stimulate the economy.
B) fiscal policy to slow down the economy.
C) monetary policy to stimulate the economy.
D) monetary policy to slow down the economy.

Accepted Answer

The Kennedy administration used fiscal policy to stimulate the economy, specifically through tax cuts and increased government spending on programs such as the space race and education. This was done in an effort to combat high levels of unemployment and promote economic growth.

Question 5

Which U.S. president, when asked why he had proposed a tax cut, responded by saying "To stimulate the economy. Don't you remember your Economics 101?"
A) Dwight D. Eisenhower
B) John F. Kennedy
C) Ronald Reagan
D) Bill Clinton

Accepted Answer

The answer of Which U.S. president, when asked why he...

Question 6

Keynes argued that aggregate demand is
A) stable, because the economy tends to return to its long-run equilibrium quickly after any disturbance to aggregate demand.
B) stable, because changes in consumption are mostly offset by changes in investment and vice versa.
C) unstable, because waves of pessimism and optimism create fluctuations in aggregate demand.
D) unstable, because of long and variable policy lags that worsen economic fluctuations.

Accepted Answer

Keynes believed that waves of pessimism and optimism can cause fluctuations in aggregate demand, making it unstable. He argued that changes in investment are not necessarily offset by changes in consumption, and that government intervention may be necessary to stabilize the economy.

Question 7

Which of the following effects results from the change in the interest rate created by an increase in government spending?
A) the investment accelerator and crowding out
B) the investment accelerator but not crowding out
C) crowding out but not the investment accelerator
D) neither crowding out nor the investment accelerator

Accepted Answer

An increase in government spending would increase the demand for loanable funds, leading to an increase in interest rates. This increase in interest rates would cause crowding out, where private investment decreases as a result of the government's increased demand for loanable funds. However, since the investment accelerator relies on changes in income, it would not be directly affected by a change in interest rates.

Question 8

The Kennedy tax cut of 1964 was
A) successful in stimulating the economy.
B) designed to shift the aggregate demand curve to the right.
C) designed to shift the aggregate supply curve to the right.
D) All of the above are correct.

Accepted Answer

The answer of The Kennedy tax cut of 1964 was
A)...

Question 9

Keynes used the term "animal spirits" to refer to
A) policy makers harming the economy in the pursuit of self interest.
B) arbitrary changes in attitudes of household and firms.
C) mean-spirited economists who believed in the classical dichotomy.
D) firms' relentless efforts to maximize profits.

Accepted Answer

Keynes used the term "animal spirits" to refer to arbitrary changes in the attitudes of households and firms, which can lead to fluctuations in economic activity. These changes can be driven by emotions such as optimism, confidence, and fear, rather than rational economic calculations.

Question 10

The Kennedy tax cut of 1964 included an investment tax credit that was designed to
A) increase aggregate demand in the short run and aggregate supply in the long run.
B) increase aggregate supply in the short run and aggregate demand in the long run.
C) only increase aggregate supply in the long run.
D) only increase aggregate demand in the short run.

Accepted Answer

The investment tax credit provided an incentive for businesses to invest in new capital and machinery, which would increase their productivity and ultimately increase aggregate supply in the long run. However, in the short run, the tax credit would also increase aggregate demand as businesses would have more funds available to be spent on investment.

Question 11

Which of the following are effects of an increase in government spending financed by a tax increase?
A) the tax increase reduces consumption; the change in the interest rate reduces residential construction
B) the tax increase reduces consumption; the change in the interest rate raises residential construction
C) the tax increase raises consumption; the change in the interest rate reduces residential construction
D) the tax increase raises consumption; the change in the interest rate reduces residential construction

Accepted Answer

When government spending is financed by a tax increase, it reduces the disposable income of consumers, which in turn reduces consumption. This reduction in consumption leads to a decrease in demand for goods and services, and ultimately a decrease in residential construction. Additionally, the increase in taxes may lead to an increase in the interest rate, which further reduces residential construction due to higher borrowing costs for homebuilders. Thus, the correct answer is A.

Question 12

Assume the following. -The MPC has a value of 0.8.
-The relationship between the interest rate, r, and investment, I, is given by the equation,
I = 20,000 - br,
Where b is a positive constant.
-Government purchases, G, are increased by $1,000.
In which of the following cases would there be no crowding out?
A) b = 0
B) b = 0.2
C) b = 0.8
D) b = 1

Accepted Answer

When b = 0, the interest rate does not affect investment (since I is constant). Therefore, an increase in government purchases would not lead to a decrease in investment due to higher interest rates, and there would be no crowding out.

Question 13

The Employment Act of 1946 states that
A) the Fed should use monetary policy only to control the rate of inflation.
B) the government should promote full employment and production.
C) the government should periodically increase the minimum wage and unemployment insurance benefits.
D) All of the above are correct.

Accepted Answer

The Employment Act of 1946 established the responsibility of the federal government to promote maximum employment, production, and purchasing power. It does not specifically mention the use of monetary policy or periodic increases of the minimum wage and unemployment insurance benefits.

Question 14

Assume that there is no accelerator affect. The MPC = 3/4. The government increases both expenditures and taxes by $600. The effect of taxes on aggregate demand is 3/4 the size of that created by government expenditures alone. The crowding out effect is 1/5 as strong as the combined effect of government expenditures and taxes on aggregate demand. How much does aggregate demand shift by?
A) $1480
B) $480
C) $160
D) None of the above is correct.

Accepted Answer

Initial change in government expenditures and taxes = $600
Multiplier for government expenditure = 1/(1-MPC) = 1/(1-3/4) = 4
Change in aggregate demand due to government expenditure = 4*$600 = $2400
Multiplier for taxes = MPC/(1-MPC) = 3/4/(1-3/4) = 3
Change in aggregate demand due to taxes = 3/4*$2400 = $1800
Combined change in aggregate demand = $2400 + $1800 = $4200
Crowding out effect = 1/5 * $4200 = $840
Net change in aggregate demand = $4200 - $840 = $3360
Therefore, aggregate demand shifts by $3360, which is not one of the answer choices. However, the closest answer choice is B, $480, which is the change in taxes alone (3/4 * $600 = $450) minus the crowding out effect ($450/5 = $90), giving a net change of $360. The difference from the actual net change may be due to rounding.

Question 15

In 1961, President John F. Kennedy, acting upon advice from his economists, proposed tax cuts. The advice he received
A) was opposed to the teaching of Keynes, who had taught that tax cuts were counterproductive.
B) was opposed to the teaching of Keynes, who had taught that all attempts to stabilize the economy were futile.
C) came from economists who had studied Keynes's ideas when those ideas were only a few years old.
D) came from economists who were unaware of Keynes's ideas because those ideas had not yet been widely disseminated at that time.

Accepted Answer

The proposal for tax cuts came from economists who had studied Keynes's ideas when those ideas were only a few years old. This is evidenced in the fact that Keynes's seminal work, "The General Theory of Employment, Interest, and Money," was published in 1936 and his ideas were not widely disseminated until later. Therefore, the advisers who recommended tax cuts to President Kennedy likely had recently studied Keynes's ideas.

Question 16

Who asserted that "the Federal Reserve's job is to take away the punch bowl just as the party gets going?"
A) president George W. Bush
B) president John F. Kennedy
C) economist John Maynard Keynes
D) former chairman of the Federal Reserve System William McChesney Martin

Accepted Answer

Former chairman of the Federal Reserve System William McChesney Martin famously said, "The Federal Reserve, in taking away the punch bowl, has to make sure that nobody gets so drunk that they can't walk home."

Question 17

The Employment Act of 1946
A) implies that the government should avoid being a cause of economic fluctuations.
B) implies that the government should respond to changes in the private economy to stabilize aggregate demand.
C) reflected the ideas promoted in Keynes's influential book, The General Theory of Employment, Interest, and Money.
D) All of the above are correct

Accepted Answer

The Employment Act of 1946 reflected the principles of Keynesian economics, which emphasized the role of government in stabilizing the economy. It implied that the government should use fiscal policy to respond to changes in the private economy and stabilize aggregate demand, while also avoiding being a cause of economic fluctuations. Therefore, all of the above options are correct.

Question 18

There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct?
A) By themselves, both the change in output and the change in the interest rate increase desired investment.
B) By themselves, both the change in output and the change in the interest rate decrease desired investment.
C) By itself, the change in output increases desired investment spending and by itself the change in the interest rate decreases desired investment spending.
D) By itself, the change in output decreases desired investment spending and by itself the change in the interest rate increases desired investment spending.

Accepted Answer

The increase in government expenditure financed by taxes will lead to an increase in output in the short run. This increase in output leads to an increase in desired investment spending. On the other hand, an increase in the interest rate will decrease desired investment spending. Therefore, option C is the correct choice.

Question 19

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?
A) the interest rate falls and aggregate supply is relatively flat
B) the interest rate falls and aggregate supply is relatively steep
C) the interest rate rises and aggregate supply is relatively flat
D) the interest rate rises and aggregate supply is relatively steep

Accepted Answer

The answer of In 2009 President Obama and Congress increased...

Question 20

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?
A) the MPC is small and changes in the interest rate have a small effect on investment
B) the MPC is small and changes in the interest rate have a large effect on investment
C) the MPC is large and changes in the interest rate have a small effect on investment
D) the MPC is large and changes in the interest rate have a large effect on investment

Accepted Answer

The answer of In 2009 President Obama and Congress increased...

Quiz 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

Keynes argued that

When taxes increase, the interest rate

The government increases both its expenditures and taxes by $400 billion. There is no crowding out and no accelerator effect. Aggregate demand shifts by $400 billion. Which of the following is consistent with how far aggregate demand shifts?

In the early 1960s, the Kennedy administration made considerable use of

Which U.S. president, when asked why he had proposed a tax cut, responded by saying "To stimulate the economy. Don't you remember your Economics 101?"

Keynes argued that aggregate demand is

Which of the following effects results from the change in the interest rate created by an increase in government spending?

The Kennedy tax cut of 1964 was

Keynes used the term "animal spirits" to refer to

The Kennedy tax cut of 1964 included an investment tax credit that was designed to

Which of the following are effects of an increase in government spending financed by a tax increase?

The Employment Act of 1946 states that

In 1961, President John F. Kennedy, acting upon advice from his economists, proposed tax cuts. The advice he received

Who asserted that "the Federal Reserve's job is to take away the punch bowl just as the party gets going?"

The Employment Act of 1946

There is an increase in government expenditures financed by taxes and its overall short-run effect on output is larger than the change in government spending. Which of the following is correct?

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?