Deck 5: Classical and Keynesian Graphical Analysis

Question 1

Suppose that there is $3 trillion of savings in the economy currently offered for borrowing. Suppose that at an interest rate of 8% only $2.6 trillion is demanded in loans by businesses for investment. What happens to the remaining savings in the economy?

A) It is redirected toward individual consumption.
B) It lies idle.
C) It is redirected toward investment spending.
D) It is appropriated by the government.

Answer 1

B

Question 2

Classical economists believe that the tendency of competition to press down the interest rates set by banks remedies the problem of planned savings exceeding planned investment.

Answer 2

True

Question 3

According to classical economics, if the federal government was to default on its debt, driving up interest rates throughout the economy, what will happen to the level of investment spending by businesses on equipment and non-residential buildings?

A) Nothing, it stays the same.
B) It will rise.
C) It will fall.

Answer 3

C

Question 4

In the classical view of the macroeconomy, the supply of savings is

A) unrelated to the interest rate.
B) inversely related to the interest rate.
C) positively related to the interest rate.
D) is fixed.

Question 5

In the classical view of the macroeconomy, if there is not enough investment spending to use all available savings

A) the Federal Reserve will raise the interest rate.
B) the interest rate will fall.
C) excess savings will be hoarded.
D) excess savings will be used to pay taxes.

Question 6

In the classical view of the macroeconomy, investment spending is

A) unrelated to the interest rate.
B) inversely related to the interest rate.
C) positively related to the interest rate.
D) is completely unpredictable

Question 7

According to Classical Economics, the reasons all savings will be invested is

A) the government will make rules to force that to happen.
B) savings will be deposited in banks and lent to investors.
C) people only save money to invest it.
D) All of the above

Question 8

Why do Classical Economists believe all savings will be invested?

A) Supply and demand.
B) Because of the circular flow.
C) Because that is what has always happened throughout history.
D) Because people only save money in order to invest it.

Question 9

If the interest rate falls:

A) Savings will rise and investment will rise.
B) Savings will fall and investment will fall.
C) Savings will rise and investment will fall.
D) Savings will fall and investment will rise.

Question 10

If the interest rate rises:

A) Savings will rise and investment will rise.
B) Savings will fall and investment will rise.
C) Savings will fall and investment will fall.
D) Savings will rise and investment will fall.

Question 11

According to Keynesian analysis of investment and savings, what element is left out of the classical solution to excess of planned savings over planned investment?

A) The effect of lower consumption on investment.
B) The effect of lower interest rates on savings.
C) The effect of lower interest rates on investment.
D) The effect of lower savings on consumption

Question 12

In the real world, a decrease in consumption will cause businesses' expectations of future profits to increase.

Question 13

According to Keynesian analysis, why might lowering interest rates not work to stimulate enough investment to absorb all of planned savings in the economy?

A) The only possible interest rate for equilibrium between savings and investment to occur would be negative.
B) Banks will not offer to pay lenders to borrow money.
C) During a recession, the outlook is for negative profits on new investment because of a lack of sufficient market demand for goods.
D) All of the above.

Question 14

According to Keynes, why might money deposited in banks not find its way to new productive investments?

A) Banks might not be confident that the would-be investors will be able to repay the loan with interest.
B) Businesses might not be confident that the investments they are contemplating will be profitable.
C) Business conditions in general are unattractive for new investments.
D) All of the above.

Question 15

In the Classical view of the macroeconomy, too many workers seeking work or unemployment will lead to

A) falling wages.
B) rising wages.
C) rising interest rates.
D) government programs to help the unemployed.

Question 16

According to Classical Economics, if the demand for labor in the entire economy falls:

A) The equilibrium wage will fall.
B) The supply of labor will rise.
C) The supply of labor will fall.
D) The equilibrium wage will rise.

Question 17

According to Classical economists, how does the economy recover from an external shock?

A) Government policy can help to stabilize the economy.
B) The economy will restore itself automatically.
C) Another outside shock will counteract the first shock.
D) External shocks have no impact on an economy as large as the United States.

Question 18

According to Keynes, people are unemployed because

A) They prefer leisure to work at the current wage rate.
B) They are waiting around for a better job that pays a higher wage than the job they could get.
C) There are an insufficient number of jobs available at the prevailing wage.
D) They are just plain lazy and don't want to work.

Question 19

Keynes stressed the importance of effective demand which is

A) when business firms are effective in convincing consumers that they have a demand for certain goods.
B) when consumers have the desire for goods and services as well as the income to purchase these goods.
C) when the demand for goods and services is effective in satisfying individuals desires.
D) when aggregate demand is less than aggregate supply.

Question 20

Conservatives and Keynesians differ on the appropriate response of the government to a recession. Which of the following is a true statement?

A) Keynesians believe that governments should increase spending to make up for a deficiency of aggregate demand.
B) Keynesians believe that governments should intervene in the economy only in the case of an outside shock.
C) Keynesians believe that governments do not need to intervene, because the economy is always in equilibrium.
D) Keynesians believe that governments can prevent an outside shock.

Question 21

If the objective of government policy during a recession is to increase aggregate demand, then it should

A) raise income taxes.
B) increase government spending.
C) decrease government transfers.
D) decrease government spending.

Question 22

If every business in the economy cuts their employees' wages, total profits in the economy will rise.

Question 23

Keynesian economists oppose wage cutting when unemployment rises because:

A) They believe it would be unfair to workers
B) Wage cutting reduces workers' income which will cause a decline in spending and unemployment
C) Wage cutting will decrease profits and reduce investment incentives
D) All of the above

Question 24

Aggregate Demand and Aggregate Supply

A) Explain why the economy sometimes goes into recession
B) Are drawn like traditional supply and demand curves only with the price level on the vertical axis
C) Are drawn like traditional supply and demand curves only with REAL GDP on the vertical axis
D) All of the above

Question 25

Aggregate demand is defined as

A) the total dollar amount of goods and services that consumers, investors, foreigners, and governments plan to buy at a given price level.
B) the total dollar amount of goods and services that business produces and plans to sell at a given price level.
C) the demand for a materials used in concrete.
D) the demand for all the various types of goods and services consumed by a household.

Question 26

Aggregate supply is defined as

A) the total output that business produces and plans to sell at a given price level.
B) the total dollar amount of goods and services that consumers, investors, foreigners, and governments plan to buy at a given price level.
C) the total quantity of goods that sellers would like to sell during a given period, at various prices, holding other things constant.
D) the total quantity of goods that buyers would like to buy during a given period, at various prices, holding other things constant.

Question 27

The Keynesian cross diagram shows

A) the relationship between equilibrium income and full employment.
B) the relationship between aggregate demand and aggregate supply.
C) the relationship between equilibrium demand and the price level.
D) the relationship between full employment and the price level.

Question 28

Diagram 6a

-Diagram 6a indicates that

A) equilibrium income is above full employment.
B) equilibrium income is below full employment.
C) equilibrium income is the same as full employment.
D) equilibrium income is the same as aggregate spending.

Question 29

Diagram 6a

-Diagram 6a indicates that

A) the economy is experiencing stagflation.
B) the economy is experiencing economic growth.
C) the economy is experiencing inflation.
D) the economy is experiencing unemployment.

Question 30

Diagram 6a

-Diagram 6a indicates that

A) aggregate spending and aggregate product are the same.
B) aggregate spending and aggregate income are the same.
C) aggregate product and aggregate income are the same.
D) aggregate spending and equilibrium income are the same.

Question 31

Diagram 6b

-Diagram 6b indicates that

A) consumption increases faster than income.
B) income is always less than consumption.
C) consumption is always less than income.
D) income increases faster than consumption.

Question 32

Diagram 6b

-Diagram 6b indicates that

A) consumption is unrelated to income.
B) consumption is positively related to income.
C) consumption is inversely related to income.
D) consumption is constant.

Question 33

Diagram 6b

-Diagram 6b indicates that when income is greater than $6,000

A) consumers are spending more than income.
B) consumers are not spending.
C) consumers are spending less than income.
D) consumers are spending exactly all of their income.

Question 34

Keynes divided spending into four great flows which are

A) consumer spending on durable goods, consumer spending on nondurable goods, consumer spending on personal services, and consumer spending on financial services.
B) business spending on buildings, business spending on equipment, business spending on raw materials, and business spending on advertising.
C) consumer spending, business spending, government spending, and spending by foreign on exports.
D) government spending on welfare, government spending on the military, government spending on education, and government spending on Social Security.

Question 35

At very low levels of income, consumer spending is likely to

A) be less than income.
B) be greater than income.
C) be the same as income.
D) be the same as savings.

Question 36

Compared to people of moderate means, the wealthy tend to have

A) Compared to people of moderate means, the wealthy tend to have
B) B) higher average propensities to save.
C) lower average propensities to save.
D) the same average propensity to consume