Deck 9: Macroeconomic Viewpoints and Models

Question 1

The four components of model building are:

A) identifying variables, collecting and analyzing data, interpreting conclusions, and forming policies.
B) identifying variables, establishing assumptions, collecting and analyzing data, and interpreting conclusions.
C) identifying variables, applying universal laws, collecting and analyzing data, and interpreting conclusions.
D) collecting and analyzing data, identifying relationships in the data, establishing assumptions, and interpreting conclusions.

Answer 1

identifying variables, establishing assumptions, collecting and analyzing data, and interpreting conclusions.

Question 2

The conclusions and policy implications of an economic model are influenced by the:

A) data that are analyzed in the model.
B) assumptions on which the model is built.
C) choice of variables described in the model.
D) all of the above.

Answer 2

all of the above.

Question 3

Which of the following statements is true?

A) Only one model is needed to fully understand the workings of the macroeconomy.
B) Generally, macroeconomic models do not require assumptions because they are based on mathematics.
C) Different macroeconomic models focus on the relationships between different variables or on different problems.
D) Economics has largely abandoned model building since advances in information technology have made current macroeconomic data widely available.

Answer 3

Different macroeconomic models focus on the relationships between different variables or on different problems.

Question 4

Assumptions:

A) are a key component of a model.
B) are conditions held to be true in a model.
C) influence the conclusions derived from the model.
D) all of the above.

Question 5

According to Application 9.1, "Paying Attention to Models: It's Worth the Effort:"

A) it has been argued that economics and religion are the two main forces shaping the world's history.
B) the influence of economics is significant, and the models used to explain economics should be thoroughly examined and understood.
C) sometimes a person's opinion about the story an economic model tells changes after its assumptions and data are explained in detail.
D) all of the above.

Question 6

Which of the following statements is most accurate?

A) Generally, the economics profession agrees that monetarism is the best approach for dealing with macroeconomic problems.
B) There is very little difference between the Keynesian and new classical viewpoints on the effectiveness of macroeconomic policies.
C) Generally, the economics profession agrees that Keynesian economics is the best approach for dealing with macroeconomic problems.
D) There is disagreement within the economics profession as to which of the various approaches is best for dealing with macroeconomic problems.

Question 7

The primary conclusion of the classical school is:

A) businesses do not change prices once they are set.
B) a free market economy will automatically operate at full employment.
C) a free market economy can operate at less than full employment for long periods of time.
D) there is no relationship between the amount saved and the amount invested in an economy.

Question 8

The position that the economy will automatically tend to operate at full employment without government intervention is most closely associated with:

A) classical economics.
B) Keynesian economics.
C) supply-side economics.
D) new Keynesian economics.

Question 9

Classical economists advocate the view that a free market economy:

A) should be replaced by a command economy.
B) will automatically tend to operate at full employment.
C) is best stabilized by using fiscal and monetary policy tools.
D) is best stabilized by extensive use of all government tools, including regulation.

Question 10

Which of the following statements about the classical school of economics is FALSE?

A) It dates back to Adam Smith and his book, The Wealth of Nations.
B) Its followers hold that government intervention is necessary to keep the economy at full employment.
C) It was largely rejected during the 1930s because it could not explain or remedy the Great Depression.
D) Its followers hold that everything leaked from the spending stream through saving is returned through investment spending.

Question 11

An important assumption of classical economic theory is:

A) savings equals investment in the macroeconomy.
B) supply creates its own demand in the macroeconomy.
C) wages and prices will either increase or decrease to ensure that the economy operates at full employment.
D) all of the above.

Question 12

The classical school assumes that:

A) supply creates its own demand, wage and prices are flexible, and savings equal investment.
B) supply creates its own demand, wage and prices are inflexible, and savings equal investment.
C) supply does not create its own demand, wage and prices are flexible, and savings do not necessarily equal investment.
D) supply does not create its own demand, wage and prices are inflexible, and savings do not necessarily equal investment.

Question 13

Which of the following is an assumption of the classical school?

A) savings equal investment.
B) wage and prices are flexible.
C) supply creates its own demand.
D) all of the above are assumptions of the classical school.

Question 14

According to the classical school of economics, if aggregate demand were to decrease and the economy were to experience some unemployment:

A) the economy would remain at that rate of unemployment indefinitely.
B) prices and wages would fall until the economy returned to full employment.
C) the supply of money would increase until the economy returned to full employment.
D) government purchases of goods and services would increase until the economy returned to full employment.

Question 15

According to the classical school of economics, an increase in aggregate demand would NOT lead to an increase in:

A) wages.
B) prices.
C) the full employment level of output.
D) any of the above.

Question 16

According to the classical school of economics, the ultimate effect of a decrease in aggregate demand when the economy is operating at full employment would be:

A) wages and prices fall.
B) the level of output falls.
C) the employment level falls.
D) all of the above.

Question 17

-Which figure correctly illustrates aggregate supply and aggregate demand according to classical economic theory?

A) Figure A.
B) Figure B.
C) Figure C.
D) Figure D.

Question 18

-Which figure illustrates an economy producing at full employment, regardless of the level of prices and wages?

A) Figure B.
B) Figure D.
C) Figure B and Figure D.
D) None of the figures.

Question 19

-According to classical economics, if aggregate demand were at AD₂ and prices and wages were at P₁W₁:

A) aggregate supply would shift to the left.
B) prices and wages would fall from P₁W₁ to P₂W₂.
C) aggregate demand would increase from AD₂ to AD₁.
D) the economy would continually operate with unemployed resources.

Question 20

-According to classical economics, if aggregate demand were at AD₂ and prices and wages were at P₁W₁:

A) prices and wages would eventually fall back to P₂W₂.
B) the aggregate demand curve AD₂ would shift to the left.
C) the full employment level of output would shift to the left.
D) prices and wages would remain at P₁W₁ and the full employment level of output would remain where it was before the change in prices and wages.

Question 21

-According to classical economics, which of the following would cause aggregate supply, AS, to shift to the left?

A) an increase in wages.
B) an increase in prices.
C) an increase in either wages or prices.
D) none of the above.

Question 22

-Based on this aggregate supply and aggregate demand figure, which statement best describes the classical economic viewpoint?

A) Aggregate supply would shift to the left if prices and wages rose from P₂W₂ to P₁W₁.
B) If prices and wages were at P₁W₁ and aggregate demand were AD₂, prices and wages would fall to P₂W₂.
C) The economy would be operating at full employment if prices and wages were at P₁W₁ and aggregate demand was AD₂.
D) If prices and wages were at P₂W₂ and aggregate demand was AD₂, an increase in prices and wages to P₁W₁ would cause demand-pull inflation.

Question 23

The classical economists assumed that savings leakages from the spending stream:

A) equal zero because people are too poor to save.
B) equal investment injections because of the operation of the interest rate.
C) exceed investment injections, which causes the level of economic activity to fall.
D) are less than investment injections because of business opportunities created by technological change.

Question 24

The classical economists assumed that savings and investment are equal because:

A) the interest rate brings savings into equality with investment.
B) the only reason investment occurs is to utilize funds that have been saved.
C) saving and investing are typically carried out by the same individuals in society.
D) savers and investors base their decisions on tax laws, which tend to coordinate their actions.

Question 25

The theory that supply creates its own demand in the macroeconomy is:

A) most closely associated with Keynesian economics.
B) the rule that was used to direct government spending to pull the U.S. economy out of the Great Depression.
C) an assumption that underlies the classical economic position that an economy automatically moves to full employment.
D) all of the above.

Question 26

A basic assumption of classical economics is:

A) supply creates its own demand.
B) demand creates its own supply.
C) the level of output determines the levels of wages and prices.
D) the level of output shifts to bring wages into equality with prices.

Question 27

Classical economics is most closely associated with a:

A) mercantilist philosophy.
B) free market philosophy.
C) mixed capitalism philosophy.
D) command economy philosophy.

Question 28

The basic policy implication of the classical school is:

A) government should maintain zero growth in the money supply.
B) there is no need for government intervention to correct economic problems.
C) government intervention to regulate the economy will be made more effective by coordinating actions of households and businesses.
D) price stickiness and conflicts between labor and management require government intervention to move an economy to full employment.

Question 29

The classical school lost popularity due to its inability to explain or offer solutions for:

A) stagflation.
B) the Great Depression.
C) rapid increases in prices.
D) the growth in power of large multinational corporations.

Question 30

After reading Application 9.2, "The Academic Scribblers,"one could conclude that individualism was important to:

A) Adam Smith, J.M. Keynes, and Milton Friedman.
B) Milton Friedman and J. M. Keynes, but not to Adam Smith, who wrote two centuries earlier.
C) J. M. Keynes, but not to Adam Smith or Milton Friedman, both of whom favored free markets.
D) Adam Smith and Milton Friedman, but not to J. M. Keynes, who favored government intervention in all economic areas.

Question 31

The primary conclusion of Keynesian economics is that:

A) there is no tradeoff between unemployment and inflation.
B) businesses will change their prices to achieve macroeconomic goals.
C) a free market economy will automatically operate at full employment.
D) a free market economy can operate at less than full employment for long periods of time.

Question 32

Which of the following is NOT a position that would be taken by a Keynesian economist?

A) Total spending is the main force driving the economy.
B) The economy will automatically move to an equilibrium level of output.
C) The economy will always move into equilibrium at the full employment level of output.
D) None of the above is a position that would be taken by a Keynesian economist.

Question 33

Which of the following views from classical economics would be accepted by a Keynesian economist?

A) Supply creates its own demand.
B) The economy will automatically go into equilibrium at a full employment level of output.
C) There is no need for government intervention to bring the economy to an acceptable level of output.
D) None of the above would be accepted by a Keynesian economist.

Question 34

In Keynesian economics, the key to understanding how total spending can be more or less than current production is the role played by:

A) net exports.
B) business inventories.
C) business investment spending.
D) government transfer payments.

Question 35

In the Keynesian model, when total spending in the economy is less than total production, business inventories:

A) increase.
B) decrease.
C) remain unchanged.
D) decrease at first and then remain unchanged.

Question 36

In the Keynesian model, if total spending by households, businesses, government units and foreign buyers is less than the total output produced in the economy, then:

A) total output will decrease.
B) total spending will increase as long as the economy is not at full employment.
C) total output will decrease and total spending will increase as long as the economy is not at full employment.
D) any of the above could happen.

Question 37

In the Keynesian model, if total spending by households, businesses, government units and foreign buyers is greater than the total output produced in the economy, then:

A) total output will increase.
B) total spending will decrease.
C) total output will increase and total spending will decrease.
D) any of the above could happen.

Question 38

According to Keynesian economics, the economy is in equilibrium when:

A) injections into the spending stream equal leakages from the spending stream.
B) total spending on new goods and services is greater than the total output of the economy plus imports.
C) the amount spent by households on goods and services equals the amount spent by businesses, government units, and foreign buyers.
D) all of the above.

Question 39

In Keynesian economics the most important factor determining whether the level of economic activity is growing or shrinking is:

A) the multiplier effect.
B) government expenditure and tax policies.
C) the behavior of nonincome-determined spending.
D) the relationship between leakages from and injections into the spending stream.

Question 40

According to the Keynesian approach, if the level of spending in an economy were $5.5 trillion and the level of output were $5.3 trillion:

A) nonincome-determined spending would be $0.2 trillion.
B) total income-determined spending would be $5.5 trillion.
C) injections into the spending stream would be $0.2 trillion.
D) injections into the spending stream would exceed leakages by $0.2 trillion.

Question 41

According to the Keynesian approach, if leakages from the spending stream exceed injections:

A) business inventories will decrease and the level of economic activity will increase.
B) business inventories will remain unchanged and the level of unemployment will decrease.
C) unplanned business inventories will accumulate and the level of economic activity will decrease.
D) unplanned business inventories will accumulate as the economy moves toward full employment.

Question 42

If, using the Keynesian approach, total output in an economy was $5.25 trillion, total spending was $5.00 trillion, and injections into the spending stream were $3.25 trillion, leakages from the spending stream would equal:

A) $0.25 trillion.
B) $3.00 trillion.
C) $3.50 trillion.
D) $4.00 trillion.

Question 43

If, using the Keynesian approach, injections into the spending stream were $2.20 trillion, leakages from the spending stream were $2.50 trillion, and total output in the economy was $4.00 trillion, total spending would be:

A) $3.70 trillion.
B) $4.00 trillion.
C) $4.30 trillion.
D) none of the above.

Question 44

If, using the Keynesian approach, injections into the spending stream were $1.2 trillion and leakages from the spending stream were $1.4 trillion:

A) total output would be $1.2 trillion.
B) total output would be $2.6 trillion.
C) business inventories would increase by $0.2 trillion.
D) business inventories would decrease by $0.2 trillion.

Question 45

Using the Keynesian approach, if total spending in the economy were greater than the level of output, injections into the spending stream would be:

A) less than leakages, and the level of output would increase.
B) less than leakages, and the level of output would decrease.
C) greater than leakages, and the level of output would increase.
D) greater than leakages, and the level of output would decrease.

Question 46

Using the Keynesian approach, if leakages from the spending stream are less than injections into the spending stream:

A) the economy is at its equilibrium level of output.
B) the economy is operating below its equilibrium level, and output will increase.
C) the economy is operating above its equilibrium level, and output will decrease.
D) the relationship between the actual and equilibrium levels of output cannot be established without more information.

Question 47

Using the Keynesian approach, if leakages from the spending stream are less than injections, the current level of output is:

A) less than the equilibrium level of output, and will increase.
B) less than the equilibrium level of output, and will decrease.
C) greater than the equilibrium level of output, and will increase.
D) greater than the equilibrium level of output, and will decrease.

Question 48

Using the Keynesian approach, an economy with $7.5 trillion in total spending and $8.0 trillion in total output is operating where:

A) injections exceed leakages by $500 billion.
B) leakages exceed injections by $500 billion.
C) injections plus leakages add up to $500 billion.
D) injections plus leakages add up to $15.5 trillion.

Question 49

Using the Keynesian approach, an economy with $9.0 trillion in total spending and $8.4 trillion in total output is operating where:

A) injections exceed leakages by $600 billion.
B) leakages exceed injections by $600 billion.
C) injections plus leakages add up to $600 billion.
D) injections plus leakages add up to $17.4 trillion.

Question 50

Using the Keynesian approach, if leakages from the spending stream are less than injections into the spending stream, total spending will be:

A) less than total output, and total output will decrease.
B) less than total output, and total spending will increase.
C) greater than total output, and total output will increase.
D) greater than total output, and total spending will decrease.

Question 51

Using the Keynesian approach, if leakages from the spending stream are greater than injections into the spending stream, total spending will be:

A) less than total output, and total output will decrease.
B) less than total output, and total spending will increase.
C) greater than total output, and total output will increase.
D) greater than total output, and total spending will decrease.

Question 52

According to the Keynesian approach, injections minus leakages equal:

A) total spending.
B) zero when the economy is in equilibrium.
C) income-determined spending minus nonincome-determined spending.
D) none of the above.

Question 53

-At an output level of $0, total injections are:

A) $0.
B) $60 billion.
C) equal to total leakages.
D) not enough information to answer the question.

Question 54

-At an output level of $100 billion, total leakages are:

A) $40 billion.
B) $50 billion.
C) $60 billion.
D) $80 billion.

Question 55

-Total planned spending at an output level of $300 billion is:

A) $280 billion.
B) $300 billion.
C) $320 billion.
D) none of the above.

Question 56

-At an output level of $400 billion:

A) leakages exceed injections by $20 billion.
B) injections exceed leakages by $20 billion.
C) leakages plus injections total $780 billion.
D) the economy is operating below its equilibrium level of output.

Question 57

-Business inventories would be expected to increase at an output level of:

A) $100 billion.
B) $200 billion.
C) $300 billion.
D) $400 billion.

Question 58

The following figure illustrates the Keynesian model of equilibrium in the macroeconomy.


-Equilibrium will occur in this economy at an output level of:

A) $0.
B) $2 trillion.
C) $5 trillion.
D) $0 and $5 trillion.

Question 59

The following figure illustrates the Keynesian model of equilibrium in the macroeconomy.


-At a total output level of $6 trillion, injections into the spending stream are:

A) zero.
B) equal to leakages from the spending stream.
C) less than leakages from the spending stream.
D) greater than leakages from the spending stream.

Question 60

The following figure illustrates the Keynesian model of equilibrium in the macroeconomy.


-If the economy were operating at an output level of $4 trillion, you would expect business inventories to be:

A) zero.
B) increasing.
C) decreasing.
D) unchanging.

Question 61

The following figure illustrates the Keynesian model of equilibrium in the macroeconomy.


-At a total output of zero:

A) injections into the spending stream are zero.
B) injections into the spending stream are $2 trillion.
C) leakages from the spending stream are $2 trillion.
D) both injections into, and leakages from, the spending stream are $2 trillion.

Question 62

The following figure illustrates the Keynesian model of equilibrium in the macroeconomy.


-The most appropriate name for the line running at a 45 degree angle through the graph would be the:

A) total output line.
B) total spending line.
C) injections and leakages line.
D) spending equals output line.

Question 63

The basis of the following figure based on the Keynesian approach.


-For this economy, the equilibrium level of output is:

A) $1 trillion.
B) $4 trillion.
C) $6 trillion.
D) none of the above.

Question 64

The basis of the following figure based on the Keynesian approach.


-If the level of output were zero:

A) the level of economic activity would grow.
B) leakages from the spending stream would be zero.
C) injections into the spending stream would be $1 trillion.
D) all of the above.

Question 65

The basis of the following figure based on the Keynesian approach.


-Injections into the spending stream exceed leakages from the spending stream by approximately $0.5 trillion at an output level of:

A) $0 trillion.
B) $2 trillion.
C) $6 trillion.
D) none of the above.

Question 66

The concept of controlling the level of economic activity by purposefully influencing the size of the spending stream is most closely associated with:

A) James Mill.
B) Adam Smith.
C) Milton Friedman.
D) John Maynard Keynes.

Question 67

The use of fiscal policy to influence the level of economic activity would most likely be suggested by someone subscribing to the:

A) classical viewpoint.
B) Keynesian viewpoint.
C) monetarist viewpoint.
D) new classical viewpoint.

Question 68

Under the Keynesian system, government intervention in an economy would NOT be required:

A) at any time.
B) when the economy is at full employment.
C) when the economy is operating above full employment.
D) when the economy is operating below full employment.

Question 69

The policy position of Keynesian economics is:

A) there is no need for government intervention to correct economic problems.
B) government should provide incentives to households and businesses to increase production.
C) government can be used to stimulate demand and move the economy to full employment.
D) government intervention in the economy will be made ineffective by actions of households and businesses.

Question 70

Keynesian economics:

A) has been the undisputed correct view of the macroeconomy since the 1930s.
B) reached its peak of popularity during the 1960s, came under attack in the 1970s and 1980s, and recently saw its policy tools used again.
C) was not popular until it was adopted by the Clinton administration as the official viewpoint for its economic policies.
D) failed during the 1930s because of its inability to explain the high rates of unemployment during the Great Depression.

Question 71

New classical economics and classical economics both:

A) hold that prices and wages are flexible.
B) hold that there will be no cyclical unemployment over the long run.
C) question the effectiveness of government intervention into the economy.
D) all of the above.

Question 72

According to new classical economics, over the long run the economy will operate:

A) at full employment.
B) with zero unemployment.
C) at the natural rate of unemployment.
D) with significant unemployment because of misguided government policies.

Question 73

A primary assumption of new classical economics is:

A) wages and prices are not flexible.
B) an upward sloping aggregate demand curve.
C) over the long run the economy will operate at the natural rate of unemployment.
D) all of the above.

Question 74

Which of the following is NOT an assumption of new classical economics?

A) free markets.
B) flexible wages and prices.
C) a downward sloping aggregate demand curve.
D) an economy operating in the long run at an unemployment rate that is higher than the natural rate.

Question 75

According to new classical economics, the aggregate demand curve for an economy is downward sloping because of the:

A) wealth effect.
B) interest rate effect.
C) foreign trade effect.
D) all of the above.

Question 76

According to new classical economics, the wealth effect, the interest rate effect, and the foreign trade effect:

A) keep the economy from operating at full employment.
B) cause the aggregate supply curve to be upward sloping.
C) cause the aggregate demand curve to be downward sloping.
D) none of the above.

Question 77

According to the new classical approach to aggregate demand:

A) increases in interest rates cause people to buy more because they are getting better returns on their investments.
B) increases in the economy's general level of prices cause people to buy more foreign-produced goods and services.
C) increases in the economy's general level of prices cause the value of people's accumulated wealth to increase, which causes them to buy more.
D) all of the above.

Question 78

In the new classical model, the aggregate supply curve is:

A) upward sloping in both the short run and the long run.
B) perfectly vertical at the natural rate of unemployment in both the short run and the long run.
C) upward sloping in the short run and perfectly vertical at the natural rate of unemployment in the long run.
D) perfectly vertical at the natural rate of unemployment in the short run and upward sloping in the long run.

Question 79

Which of the following statements about aggregate demand and supply in the new classical model is FALSE?

A) In the short run there can be an increase in aggregate demand without an increase in the general level of prices.
B) In the long run there can be an increase in aggregate demand without an increase in the general level of prices.
C) In the short run there can be an increase in the general level of prices when there is no change in aggregate supply.
D) In the long run there can be an increase in the general level of prices when there is no change in aggregate supply.

Question 80

According to the new classical approach, an increase in aggregate demand could lead to an increase in total output in:

A) the short run and the long run.
B) the short run but not the long run.
C) the long run but not the short run.
D) neither the long run nor the short run.