Question 1

Explain the principle of general equilibrium.

Accepted Answer

General equilibrium refers to a situation in which both the goods market and the money market are in equilibrium.There will be only a combination of interest rate and national income where this is the case, and this combination will be the one at which the IS and LM curves cross.In general equilibrium planned expenditure is equal to actual expenditure.

Question 2

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

A) True 
 B)False  True

Question 3

What did Keynes mean by an inflationary and deflationary gap?

Accepted Answer

The inflationary gap is the difference between full employment output and actual expenditure when actual expenditure is greater than full employment output.
The deflationary or output gap the difference between full employment output and expenditure when expenditure is less than full employment output.

Question 4

Which of the following statements about Keynesian views is true?

Accepted Answer

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. 
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.

Question 5

In the IS-LM model the money supply is assumed to be

Accepted Answer

A) determined by the interest rate. 
B) endogenous. 
C) fixed by the government. 
D) exogenous. 
A) determined by the interest rate. 
B) endogenous. 
C) fixed by the government. 
D) exogenous.

Question 6

The investment and saving line in the IS-LM model connects

Accepted Answer

A) points of equilibrium in the goods market at different interest rates. 
B) points of equilibrium in the money market at different interest rates. 
C) points of equilibrium in the goods market and the money market. 
D) points at which investment and saving are equal. 
A) points of equilibrium in the goods market at different interest rates. 
B) points of equilibrium in the money market at different interest rates. 
C) points of equilibrium in the goods market and the money market. 
D) points at which investment and saving are equal.

Question 7

A shift in the LM curve can occur because

Accepted Answer

A) interest rates change so frequently. 
B) of contractions and expansions in the money supply. 
C) of the strength of the velocity of circulation. 
D) of a shift in the demand for money. 
A) interest rates change so frequently. 
B) of contractions and expansions in the money supply. 
C) of the strength of the velocity of circulation. 
D) of a shift in the demand for money.

Question 8

If the marginal propensity to consume in the economy is 0.8 and the government increases its spending this year by R10 billion, what will be the additional increase in expenditure in the economy next year?

Accepted Answer

A) R10 billion 
B) R8 billion 
C) R2 billion 
D) R0.8 billion 
A) R10 billion 
B) R8 billion 
C) R2 billion 
D) R0.8 billion

Question 9

Which of the following will not weaken the value of the multiplier in an economy in response to a change in autonomous spending?

Accepted Answer

A) A rise in net imports. 
B) A fall in the marginal propensity to consume. 
C) An increase in the proportion of tax taken of every euro earned. 
D) An increase in the interest rate. 
A) A rise in net imports. 
B) A fall in the marginal propensity to consume. 
C) An increase in the proportion of tax taken of every euro earned. 
D) An increase in the interest rate.

Question 10

In which of the following situations would the multiplier effect on a country's economy of a tax cut implemented by that country's government be greatest?

Accepted Answer

A) The country is very open to international trade and imports are high relative to GDP. 
B) The country's citizens are affluent and tend to save a relatively high proportion of their income. 
C) The country's citizens have relatively low incomes and spend little on foreign holidays or imported goods. 
D) The country's citizens are cautious and sceptical, leading them to assume that the tax cut will soon be reversed. 
A) The country is very open to international trade and imports are high relative to GDP. 
B) The country's citizens are affluent and tend to save a relatively high proportion of their income. 
C) The country's citizens have relatively low incomes and spend little on foreign holidays or imported goods. 
D) The country's citizens are cautious and sceptical, leading them to assume that the tax cut will soon be reversed.

Question 11

The slope of the IS curve is dependent upon

Accepted Answer

A) the marginal propensity to save. 
B) the slope of the expenditure line from which it is derived. 
C) how often the central bank changes interest rates. 
D) the proportionate change in autonomous spending. 
E) the responsiveness of consumption and investment to changes in interest rates. 
A) the marginal propensity to save. 
B) the slope of the expenditure line from which it is derived. 
C) how often the central bank changes interest rates. 
D) the proportionate change in autonomous spending. 
E) the responsiveness of consumption and investment to changes in interest rates.

Question 12

Figure 4
  
-Refer to Figure 4 above.Assuming that Y₂ represents a level of national income lower than the full employment level, and that inflation has remained unchanged after the event that caused the IS curve to shift, what should the monetary authorities do if they wish to reduce unemployment?

Accepted Answer

A) Increase the money supply. 
B) Reduce the money supply. 
C) Advise the government to raise taxes. 
D) Advise the government to reduce taxes. 
A) Increase the money supply. 
B) Reduce the money supply. 
C) Advise the government to raise taxes. 
D) Advise the government to reduce taxes.

Question 13

If the economy is suffering from demand deficient unemployment then Keynes would recommend

Accepted Answer

A) cutting long term interest rates in order to boost investment. 
B) increasing the level of government spending to shift the expenditure line upwards. 
C) changing the marginal propensity to consume to bring about equilibrium in the economy at full employment output. 
D) increasing imports to help boost national income by shifting the expenditure line upwards. 
A) cutting long term interest rates in order to boost investment. 
B) increasing the level of government spending to shift the expenditure line upwards. 
C) changing the marginal propensity to consume to bring about equilibrium in the economy at full employment output. 
D) increasing imports to help boost national income by shifting the expenditure line upwards.

Question 14

The supply of real money balances is given by the equation

Accepted Answer

A) MV = PY 
B) MP × 1/y 
C) 1 / (1-MP) 
D) M/P 
E) P × M 
A) MV = PY 
B) MP × 1/y 
C) 1 / (1-MP) 
D) M/P 
E) P × M

Question 15

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) True 
 B)False

Question 16

Refer to Figure 2 below.Which of the following statements is NOT true? Figure 2

Accepted Answer

A) The upward shift in the expenditure line from C+I+G+(X-M)1 to C+I+G+(X‑M)₂ and consequent increase in national income would result from a reduction in interest rates. 
B) The upward shift in the expenditure line from C+I+G+(X-M)1 to C+I+G+(X‑M)₂ and consequent increase in national income would result from an increase in exports. 
C) The upward shift in the expenditure line from C+I+G+(X-M)1 to C+I+G+(X‑M)₂ and consequent increase in national income would result from a reduction in saving. 
D) The upward shift in the expenditure line from C+I+G+(X-M)1 to C+I+G+(X‑M)₂ and consequent increase in national income would result from a reduction in government expenditure. 
A) The upward shift in the expenditure line from C+I+G+(X-M)1 to C+I+G+(X‑M)₂ and consequent increase in national income would result from a reduction in interest rates. 
B) The upward shift in the expenditure line from C+I+G+(X-M)1 to C+I+G+(X‑M)₂ and consequent increase in national income would result from an increase in exports. 
C) The upward shift in the expenditure line from C+I+G+(X-M)1 to C+I+G+(X‑M)₂ and consequent increase in national income would result from a reduction in saving. 
D) The upward shift in the expenditure line from C+I+G+(X-M)1 to C+I+G+(X‑M)₂ and consequent increase in national income would result from a reduction in government expenditure.

Question 17

A deflationary gap occurs because

Accepted Answer

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. 
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.

Question 18

If a central bank wants to reduce interest rates it will instruct its traders to

Accepted Answer

A) instruct all financial institutions to adjust rates accordingly. 
B) reduce liquidity in financial markets. 
C) buy bonds on the open market. 
D) carry out open market operations by buying shares on the stock exchange. 
A) instruct all financial institutions to adjust rates accordingly. 
B) reduce liquidity in financial markets. 
C) buy bonds on the open market. 
D) carry out open market operations by buying shares on the stock exchange.

Question 19

The multiplier model implies that

Accepted Answer

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. 
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.

Question 20

In the IS-LM model, a rise in the general level of prices will shift

Accepted Answer

A) the LM curve to the left. 
B) the LM curve to the right. 
C) the IS curve to the left. 
D) both the IS and LM curves. 
A) the LM curve to the left. 
B) the LM curve to the right. 
C) the IS curve to the left. 
D) both the IS and LM curves.

Explain the principle of general equilibrium.

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

What did Keynes mean by an inflationary and deflationary gap?

Which of the following statements about Keynesian views is true?

In the IS-LM model the money supply is assumed to be

The investment and saving line in the IS-LM model connects

A shift in the LM curve can occur because

If the marginal propensity to consume in the economy is 0.8 and the government increases its spending this year by R10 billion, what will be the additional increase in expenditure in the economy next year?

Which of the following will not weaken the value of the multiplier in an economy in response to a change in autonomous spending?

In which of the following situations would the multiplier effect on a country's economy of a tax cut implemented by that country's government be greatest?

The slope of the IS curve is dependent upon

Figure 4 -Refer to Figure 4 above.Assuming that Y₂ represents a level of national income lower than the full employment level, and that inflation has remained unchanged after the event that caused the IS curve to shift, what should the monetary authorities do if they wish to reduce unemployment?

If the economy is suffering from demand deficient unemployment then Keynes would recommend

The supply of real money balances is given by the equation

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.

Refer to Figure 2 below.Which of the following statements is NOT true? Figure 2

A deflationary gap occurs because

If a central bank wants to reduce interest rates it will instruct its traders to

The multiplier model implies that

In the IS-LM model, a rise in the general level of prices will shift

What Is Economics

Thinking Like an Economist

Measuring a Nations Well-Being

Measuring the Cost of Living

Production and Growth

Unemployment

Saving, Investment and the Financial System

The Basic Tools of Finance

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Business Cycles

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short Run Trade-Off Between Inflation and Unemployment

Supply Side Policies

The Financial Crisis and Sovereign Debt

Common Currency Areas and European Monetary Union

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Exam 14: Keynesian Economics and the Is-Lm Analysis

Explain the principle of general equilibrium.

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

What did Keynes mean by an inflationary and deflationary gap?

Which of the following statements about Keynesian views is true?

In the IS-LM model the money supply is assumed to be

The investment and saving line in the IS-LM model connects

A shift in the LM curve can occur because

If the marginal propensity to consume in the economy is 0.8 and the government increases its spending this year by R10 billion, what will be the additional increase in expenditure in the economy next year?

Which of the following will not weaken the value of the multiplier in an economy in response to a change in autonomous spending?

In which of the following situations would the multiplier effect on a country's economy of a tax cut implemented by that country's government be greatest?

The slope of the IS curve is dependent upon

Figure 4 -Refer to Figure 4 above.Assuming that Y₂ represents a level of national income lower than the full employment level, and that inflation has remained unchanged after the event that caused the IS curve to shift, what should the monetary authorities do if they wish to reduce unemployment?

If the economy is suffering from demand deficient unemployment then Keynes would recommend

The supply of real money balances is given by the equation

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.

Refer to Figure 2 below.Which of the following statements is NOT true? Figure 2

A deflationary gap occurs because

If a central bank wants to reduce interest rates it will instruct its traders to

The multiplier model implies that

In the IS-LM model, a rise in the general level of prices will shift

What Is Economics

Thinking Like an Economist

Measuring a Nations Well-Being

Measuring the Cost of Living

Production and Growth

Unemployment

Saving, Investment and the Financial System

The Basic Tools of Finance

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Business Cycles

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short Run Trade-Off Between Inflation and Unemployment

Supply Side Policies

The Financial Crisis and Sovereign Debt

Common Currency Areas and European Monetary Union

Filters