Deck 11: Classical and Keynesian Economics

Question 1

Which statement is true?

A)Both Keynes and the classicals believed that equilibrium GDP and full employment GDP are equal.
B)Neither Keynes nor the classicals believed that equilibrium GDP and full employment GDP are equal.
C)Keynes believed that equilibrium GDP and full employment GDP are equal,but the classicals did not.
D)The classicals believed that equilibrium GDP and full employment GDP are equal,but Keynes did not.

Answer 1

D

Question 2

Say's law

A)was a basic pillar of classical economics.
B)was a basic pillar of Keynesian economics.
C)was formulated during the Great Depression.
D)proves that we can never have full employment.

Answer 2

A

Question 3

According to the classicals,our economy can produce beyond the full employment output

A)only in the short run.
B)only in the long run.
C)in both the short run and the long run.
D)in neither the short run nor the long run.

Answer 3

A

Question 4

The Keynesian and classical aggregate supply analyses

A)are completely different.
B)have some similarities.
C)are very similar.

Question 5

Which question did John Maynard Keynes pose for the classical economists?

A)What if their policies led to inflation?
B)What if savings and investment were not equal?
C)What if government intervention did not cure a recession?
D)John Maynard Keynes posed none of these questions

Question 6

Keynes and the classicals used _____ aggregate demand and supply apparatuses and came to _____ conclusions.

A)the same;the same
B)different;different
C)the same;different
D)different;the same

Question 7

The price level rises more rapidly as the maximum output level is approached along an aggregate supply curve because

A)profit-taking firms are exploiting their market size and power.
B)of the profit incentive.
C)the costs of additional units of aggregate output begin to rise more rapidly,causing firms to seek higher prices to cover these rising costs.
D)None of the choices are correct.

Question 8

Which best describes the classical theory of employment?

A)We will always have a great deal of unemployment.
B)We will usually have a great deal of unemployment.
C)We will occasionally have some unemployment,but our economy will automatically move back toward full employment.
D)We never have any unemployment.

Question 9

At equilibrium GDP

A)Savings = investment,but aggregate demand does not equal aggregate supply.
B)Savings = investment and aggregate demand = aggregate supply.
C)Savings does not equal investment and aggregate demand does not equal aggregate supply.
D)Savings does not equal investment,but aggregate demand = aggregate supply.

Question 10

To fight a depression,Keynes said that the government should

A)do nothing.
B)raise taxes.
C)spend money on carefully chosen projects.
D)spend a lot of money.

Question 11

When the average price level in the United States,relative to the average price levels in other countries,rises,this tends to

A)raise imports and exports.
B)lower imports and exports.
C)raise imports and lower exports.
D)lower imports and raise exports.

Question 12

Laissez-faire economics was advocated by

A)both Keynes and the classicals.
B)neither Keynes nor the classicals.
C)the classicals,but not by Keynes.
D)Keynes,but not by the classicals.

Question 13

Our economy is always tending towards full employment according to

A)John Maynard Keynes.
B)the classical economists.
C)both Keynes and the classicals.
D)neither Keynes nor the classicals.

Question 14

According to the classical economists,if the amounts of money people are planning to invest is greater than the amount that people want to save,

A)interest rates will rise and savings will rise.
B)interest rates will fall and savings will fall.
C)interest rates will fall and savings will rise.
D)interest rates will rise and savings will fall.

Question 15

According to Keynes an equilibrium below full employment is

A)impossible.
B)inevitable.
C)a strong possibility.

Question 16

According to Keynes,at equilibrium,aggregate demand will always equal each of the following EXCEPT

A)C + I.
B)C + S.
C)full employment GDP.
D)aggregate supply.

Question 17

When Henry Ford doubled his worker's wages in 1914,he was implicitly recognizing

A)the wage-price flexibility concept.
B)Say's Law.
C)the paradox of thrift.
D)the real balance effect.

Question 18

Which of the following statements is FALSE?

A)Until the 1970s the American economy was essentially a closed system.
B)Until the 1970s Say's Law best described our economic system.
C)The American economy is more dependent on foreign manufacturing today than it was in the 1970s,and is therefore more of a closed economy.
D)The American economy today is an open economy where supply no longer creates its own demanD.

Question 19

At equilibrium GDP,aggregate demand _______ aggregate supply and savings _______ investment.

A)is equal to;is equal to
B)is not equal to;is not equal to
C)is equal to;is not equal to
D)is not equal to;is equal to

Question 20

Under what condition will an increase in aggregate demand result in no increase in the price level?

A)The aggregate demand curve is upward sloping.
B)The aggregate demand curve intersects the upward-sloping segment of the aggregate supply curve.
C)The aggregate demand curve intersects the horizontal segment of the aggregate supply curve.
D)The aggregate demand curve intersects the downward-sloping segment of the aggregate supply curve.
E)The aggregate demand curve intersects a vertical segment of the aggregate supply curve.

Question 21

An increase in aggregate demand in the classical range of the aggregate supply curve will

A)increase the price level,but not affect the real domestic output.
B)increase real domestic output,but not affect the price level.
C)decrease both real domestic output and the price level.
D)increase both real domestic output and the price level.

Question 22

"The economy can be in equilibrium,with aggregate supply equal to aggregate demand,at a level substantially below the full employment level of output." This statement best describes the views of

A)both the classical economists and the Keynesians.
B)neither the classical economists nor the Keynesians.
C)the classical economists.
D)the Keynesians.

Question 23

The notion that everything the economy produces is purchased

A)sums up Say's law.
B)can be restated as "demand creates its own supply."
C)refers to the real balance effect.
D)was a critical assumption Keynes made in explaining the worldwide depression of the 1930s.

Question 24

In order to predict changes in aggregate demand,it must be possible to forecast

A)changes in the demand for investment goods.
B)changes in the demand for consumer goods.
C)changes in the demand for money.
D)All of the choices are correct.

Question 25

If aggregate demand increases and,as a result,the price level increases but equilibrium real GDP and employment remain unchanged,we can assume that the aggregate demand curve

A)intersects the upward-sloping segment of the aggregate supply curve.
B)intersects the vertical segment of the aggregate supply curve.
C)intersects the horizontal segment of the aggregate supply curve.
D)is horizontal.

Question 26

The vertical portion of the AS curve

A)is a short-run phenomenon.
B)shows national output rising with the price level.
C)does not shift over time,due to economic growth.
D)represents the maximum output level.

Question 27

In the "classical" region of the aggregate supply curve,

A)because there are substantial amounts of unemployed resources,output can be increased without driving up prices.
B)the economy is at the maximum output level,so only the composition of output can be changed,the quantity of output cannot be increased.
C)the economy is on the production possibilities frontier.
D)attempts to expand output will result in increases in both prices and output.
E)the economy is at the maximum output level,so only the composition of output can be changed,the quantity of output cannot be increased AND the economy is on the production possibilities frontier.

Question 28

Under what condition will a decrease in aggregate demand result in no decline in the price level?

A)The aggregate demand curve intersects a downward-sloping segment of the aggregate supply curve.
B)The aggregate demand curve intersects an upward-sloping segment of the aggregate supply curve.
C)The aggregate demand curve intersects a vertical segment of the aggregate supply curve.
D)The aggregate demand curve is upward sloping.
E)The aggregate demand curve intersects a horizontal segment of the aggregate supply curve.

Question 29

Keynesian theory

A)Established the validity of Say's Law.
B)Assumes that supply creates its own demand.
C)Is primarily demand-oriented.
D)Assigns much importance to aggregate supply and the average price level.

Question 30

According to classical macroeconomic theory,

A)aggregate supply automatically adjusts to shifts in aggregate demand.
B)demand creates its own supply.
C)flexible prices,wages,and interest rates assure full-employment equilibrium.
D)desired investment typically exceeds desired saving.

Question 31

If the economy is in the vertical portion of the AS curve,what will be the effect of an increase in the price level on output produced?

A)Output will increase at a very rapid rate
B)Output will not change
C)Output will only slightly increase
D)Output change cannot be predicted from information given

Question 32

The classical theory of the loanable funds market concluded that

A)Saving and investment would not be equal because of changes in the volume of bank credit.
B)An increase in the desire to save would increase the interest rate and lower the volume of investment.
C)The interest rate would equate saving and investment and thereby undermine Say's law.
D)The interest rate would equate saving and investment and thereby cause Say's law to be valiD.

Question 33

The wealth or real balances effect indicates that

A)An increase in the price level will increase the demand for money,increase interest rates,and reduce consumption and investment spending
B)A lower price level will decrease the real value of many financial assets and therefore cause a decline in spending
C)A higher price level will increase the real value of many financial assets and therefore cause a decline in spending
D)A higher price level will decrease the real value of many financial assets and therefore cause a decline in spending

Question 34

Keynesian economics finds fault with the classical economic argument that wage and price flexibility would guarantee full employment because

A)large unions and businesses resist wage and price cuts and lower wages mean decreased incomes and consumer spending.
B)employment decisions are not influenced by wage rates.
C)investment decisions are made independently of wages and prices.
D)wage and price fluctuations have no bearing on levels of income and employment.
E)the National Labor Relations Act prohibits wage cuts.

Question 35

John Maynard Keynes

A)agreed with classical writers that strong automatic pressures drive market economies to full employment.
B)focused on attaining the long-run macroeconomic goal of high,but stable economic growth.
C)argued that a market economy might become stuck in a short-run equilibrium in which substantial capital and labor lay idle.
D)argued that short-run equilibrium occurs only at full employment.

Question 36

Increases in aggregate demand

A)lead to increases in real interest and unemployment rates if there is considerable excess capacity in the economy.
B)result only in inflation when the economy operates at its maximum productive capacity.
C)may be caused by ever-greater downward pressures on prices and wages if reserve requirements are raised.
D)may be caused by an increase in taxes.
E)increase both inflation and the unemployment rates.

Question 37

Classical economics was based upon the belief that

A)government intervention was essential for economic stability.
B)aggregate demand (or aggregate expenditures)was the principal force controlling income and employment.
C)a redistribution of wealth from the rich to the poor was necessary to prevent the evolution of a welfare state.
D)full employment was the natural state of the economy and that government should not interfere with the private market forces of supply and demanD.
E)the business cycle was caused by large monopolistic corporations that restricted output in order to charge artificially high prices.

Question 38

As the maximum output level (real GDP)is approached,the aggregate supply curve

A)becomes flatter.
B)is downward sloping.
C)becomes steeper.
D)remains unchangeD.

Question 39

If the economy is in the vertical portion of the AS curve,what will be the effect on an increase in the price level on the level of employment?

A)There will be substantial increase in employment
B)There will be a less than proportional increase in employment
C)There will be no change in employment
D)Cannot be predicted from the information given

Question 40

The classical theory of employment held that

A)total consumption would always equal total saving.
B)the savings of wealthy households would be borrowed and spent on consumer goods by poor households.
C)investment might either be less than,or greater than,saving.
D)the savings of households would all be borrowed and invested by businesses.

Question 41

If the aggregate supply curve is upward sloping,an increase in aggregate demand will

A)increase real GDP at a constant level of prices.
B)reduce real GDP but increase the price level.
C)increase real GDP but reduce the price level.
D)reduce both real GDP and the price level.
E)increase both real GDP and the price level.

Question 42

According to the classical economists

A)a market economy should never experience unemployment.
B)a market economy should never experience inflation.
C)if unemployment appears,it would soon disappear because of a reduction in interest rates,wages,and prices.
D)if inflation appeared it would soon disappear because of a reduction in interest rates,wages,and prices.

Question 43

The curve showing the amount of real output,or real GDP,that will be made available by sellers at various price levels is called the

A)aggregate demand curve.
B)real gross domestic investment curve.
C)aggregate supply curve.
D)Keynesian cross.
E)aggregate individual demand curve.

Question 44

The aggregate supply curve shows

A)how the cost of living is related to the sum of consumption,investment,and government spending.
B)how demand for final products is related to the price level.
C)how production in the economy is related to the price level.
D)None of the choices are shown by the aggregate supply curve.

Question 45

If the aggregate supply curve is horizontal,

A)there are unemployed resources.
B)the economy is inside the production possibilities frontier.
C)it is possible to increase output,without driving up prices,by putting unemployed resources to work.
D)All of the choices are correct.

Question 46

A nearly vertical aggregate supply curve occurs

A)when the economy is producing close to the maximum output level.
B)whenever an economy is in a recession.
C)in an economy with considerable cyclical unemployment.
D)in an economy with much idle capacity.

Question 47

The classical economists argued that

A)a market economy will not experience unemployment.
B)if unemployment occurs it will cure itself because prices,wages,and interest rates will fall.
C)aggregate demand may not be large enough to take the entire supply of goods and services off the market.
D)if inflation occurs it will cure itself because prices,wages,and interest rates will rise.

Question 48

Which of the following will cause a change in aggregate demand?

A)A change in consumer demand
B)A change in the demand for investment goods
C)A change in government spending
D)All of the choices will cause a change in aggregate demanD.

Question 49

Classical economists and monetarists perceive

A)investors' expectations about returns on investment as unstable.
B)large investment swings as responses to small changes in interest rates.
C)that the best way to cure unemployment is to start a war.
D)that the proper cure for unemployment is active fiscal policy.

Question 50

We would expect the aggregate demand curve to be

A)Vertical.
B)Horizontal.
C)Upward sloping.
D)Downward sloping.
E)Undefined.

Question 51

According to the classical economists,an increase in unemployment

A)could not occur.
B)would be made worse by a decrease in interest rates.
C)would be reduced by an increase in interest rates,wages,and prices.
D)would be reduced by a decrease in interest rates,wages,and prices.

Question 52

Unintended inventory changes

A)precipitate explosive inflations of highly unstable stagflation.
B)are less important in Keynesian than in classical models.
C)ensure that planned saving is always equal to planned investment.
D)are signals to business firms to increase or cut production.

Question 53

The principal cause of the Great Depression of the 1930s was

A)a collapse in aggregate demand.
B)a collapse in aggregate supply.
C)a collapse in the average price level.
D)a collapse in government spending.
E)the outbreak of the Second World War.

Question 54

Which of the following is incorrect?

A)As the American average price level rises,American goods become relatively more expensive so that our exports fall and our imports rise.
B)As the average price level falls,the interest rate declines,and interest-rate sensitive spending increases.
C)When the average price level increases,real balances increase,businesses and households find themselves wealthier and therefore increase their spending.
D)An increase in aggregate supply tends to increase real domestic output and reduce the average price level.

Question 55

Suppose our economy is in macroeconomic equilibrium with an upward-sloping aggregate supply curve and a downward-sloping aggregate demand curve.An increase in aggregate demand will

A)increase aggregate supply.
B)decrease the price level.
C)cause the aggregate supply curve to shift to the right.
D)increase real GDP.

Question 56

The aggregate demand curve shows a(n)

A)positive relationship between prices and quantities.
B)inverse relationship between the price level and the aggregate quantity demanded.
C)independent relationship between the price level and the aggregate quantity demanded.
D)inverse relationship between the product price and the quantity of a good demandeD.

Question 57

Classical economists believed that

A)if saving exceeded investment,prices and interest rates would rise as business accumulated unwanted inventories.
B)flexible prices and wages could not restore an economy to full employment if the interest rate were rigid.
C)flexible interest rates,wages,and prices would assure full employment.
D)voluntary unemployment reflected economic inefficiency.
E)all unemployment was involuntary.

Question 58

A curve depicting the relationship between the average price level and the inflation-adjusted quantity of final goods and services produced in the economy is called an

A)aggregate expenditure curve.
B)aggregate demand curve.
C)aggregate supply curve.
D)aggregate income curve.

Question 59

The Keynesian point of view suggests that

A)supply creates its own demand.
B)demand creates its own supply.
C)the market is always at equilibrium.
D)full employment is the natural result of market forces.
E)wage and price controls can halt deflationary pressures.

Question 60

Classical employment theory holds that

A)wages are flexible upward and downward in the long run.
B)an excess of saving over investment (a surplus in the loanable funds market)at any given interest rate will cause the interest rate to fall.
C)unemployment will cause wages and prices to decline.
D)All of the choices are true of classical employment theory.

Question 61

The classical macroeconomic model argues that the economy has built-in forces that automatically eliminate unemployment and quickly move the economy to its full employment level of real GDP.Which assumption is critical to this argument?

A)Rigid wages and prices
B)Flexible wages and prices
C)Natural rate of unemployment
D)Profit motive
E)None of the choices are correct.

Question 62

Keynesians tend to believe that

A)laissez-faire policies stabilize market economies.
B)monetary restraint aggravates inflationary pressures.
C)massive government spending and tax cuts are cures for recession.
D)expansionary monetary policy revives an economy from recession.
E)the velocity of money rises if the money supply grows during recessions.

Question 63

Aggregate demand will decrease when there are

A)decreases in government spending.
B)increases in consumer and business confidence.
C)increases in inflationary expectations.
D)decreases in the price level.
E)declines in the demand for money.

Question 64

Curve XY represents ____________.

A)short-run aggregate demand
B)long-run aggregate demand
C)short-run aggregate supply
D)long-run aggregate supply

Question 65

Keynesians tend to believe that

A)laissez-faire policies stabilize market economies.
B)recessions are temporary.
C)expansionary government spending and tax cuts are cures for recessions and depressions.
D)in the short run,aggregate supply should be manipulated to stabilize the economy.

Question 66

Keynes thought that the major economic reason for the Great Depression was

A)the existence of labor unions.
B)a lack of investment due to poor profit expectations.
C)the existence of monopolies.
D)high interest rates.

Question 67

The foreign purchases effect suggests that a decrease in the American price level relative to those in other countries will

A)shift the aggregate demand curve leftward.
B)shift the aggregate supply curve leftward.
C)decrease American exports and increase American imports.
D)increase American exports and decrease American imports.

Question 68

Which of the following solutions would a Keynesian economist suggest to avoid turning the recession of the late 20s into the depression of the 30s?

A)Balance the federal budget
B)Decrease the available of unemployment compensation
C)Decrease the interest rate
D)Decrease government spending

Question 69

Curve YZ represents ____________.

A)short-run aggregate demand
B)long-run aggregate demand
C)short-run aggregate supply
D)long-run aggregate supply

Question 70

The wealth or real balances effect indicates that

A)a higher interest rate will increase the real value of many financial assets and therefore cause an increase is spending
B)a higher interest rate will decrease the real value of many financial assets and therefore cause a decline in spending
C)an increase in the price level will increase the demand for money,increase interest rates,and reduce consumption and increase spending
D)a lower interest rate will increase the real value of many financial assets and therefore cause an increase in spending

Question 71

The aggregate supply curve will be horizontal if

A)there is no cyclical unemployment.
B)the economy is operating with considerable idle capacity.
C)the economy is close to full employment.
D)the economy is producing real GDP in excess of its potential.

Question 72

Which is NOT a reason that an aggregate supply curve might slope upward to the right?

A)As production increases,people want to buy less.
B)As production increases,wages are bid up.
C)As production increases,interest rates rise.
D)As prices rise,producers expand output.

Question 73

Which of the following is not an aspect of Keynesian economics?

A)Wages and prices tend to be inflexible downward.
B)Supply does not necessarily generate its own demand.
C)Saving depends directly upon the level of income.
D)Unemployment is a temporary phenomenon.

Question 74

In the classical model where aggregate supply is vertical with respect to the price level,an increase (shift)in aggregate demand will yield

A)a relatively large increase in output.
B)an equal change in output.
C)a relatively large increase in the price level.
D)a relatively small change in the price level.

Question 75

According to Keynesian theory

A)changes in the equilibrium interest rate will not always equate saving and investment.
B)prices and wages are flexible downward.
C)Say's law is valid.
D)savers and investors have identical motives.

Question 76

Real money balances

A)refer to the amounts of nominal money that individuals hold.
B)are computed by deflating nominal money assets by the average price level.
C)refer to the amounts of American money that an individual holds relative to gold or foreign currencies.
D)are measured by currency holdings rather than holdings in checking accounts.
E)are identical to nominal money balances in the long run.

Question 77

As illustrated in an aggregate demand-aggregate supply diagram,if the economy is at full employment and aggregate demand increased

A)the price level and real GDP would decrease.
B)the price level and real GDP would increase.
C)the price level would increase and real GDP would remain unchanged.
D)the price level would increase and real GDP would decrease.
E)the price level would remain the same and real GDP would increase.

Question 78

What is the aggregate supply curve?

A)A curve showing the various quantities of total real output that business will purchase for investment at various alternative price levels.
B)A curve showing the various quantities of total real output that will be offered for sale at various alternative price levels.
C)A curve showing the various quantities of goods and services that households will provide at various alternative price levels.
D)A curve showing business investment at various alternative price levels.

Question 79

According to Keynes,lengthy recessions can occur because

A)nominal wages fall rapidly when there is a decrease in aggregate demand,which leaves workers with less income to spend.
B)the stock market tends to overreact to economic forecasts.
C)there is significant downward rigidity in prices and wages.
D)None of the choices are correct.

Question 80

The long-run aggregate supply curve,according to the classical model,

A)is vertical at full employment GDP.
B)slopes gently upward.
C)is horizontal at the equilibrium price level.
D)may be downward sloping.
E)slopes steeply upward.