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Ch25 Keynesian Perspective

*Ch25 Keynesian Perspective*

*Multiple Choice Questions*

*1.* Consumption, investment, government spending, exports, and imports are:

A. all complementary elements of a market-orientated economy.
B. some of the opposing elements found in a market-orientated economy.
C. all components of aggregate demand.
D. some of the building blocks of Keynesian analysis.

Answer: C Reference:

Explanation:

Type: Multiple Choice Category: Remember

*2.* If markets throughout the global economy all have flexible and continually adjusting prices, then:

A. all market-oriented economies will implement coordinated wage reductions.
B. each economy will always head for its natural rate of unemployment.
C. each economy must shift in aggregate demand and create additional employment.
D. all changes in prices and wages will create additional employment.

Answer: B Reference:

Explanation:

Type: Multiple Choice Category: Analyze

*3.* Keynesian economics focuses on explaining why recessions and depressions occur, as well as offering a ______________________ for minimizing their effects.

A. pricing strategy
B. macro-economic model
C. set of menu costs
D. policy prescription

Answer: D Reference:

Explanation:

Type: Multiple Choice Category: Remember

*4.* Aggregate demand is more likely to _________________ than aggregate supply in the short run.

A. shift substantially
B. remain unchanged
C. decrease substantially
D. increase slightly

Answer: A Reference:

Explanation:

Type: Multiple Choice Category: Remember

*5.* The equilibrium quantity of labor and the equilibrium wage level decrease when:

A. labor supply shifts to the right, if wages are flexible.
B. labor demand shifts to the right, if wages are flexible.
C. labor demand shifts to the left, if wages are flexible.
D. labor supply shifts to the left, if wages are flexible.

Answer: C Reference:

Explanation:

Type: Multiple Choice Category: Analyze

*6.* The equilibrium quantity of labor and the equilibrium wage increase when:

A. labor supply shifts to the right, if wages are flexible.
B. labor demand shifts to the right, if wages are flexible.
C. labor demand shifts to the left, if wages are flexible.
D. labor supply shifts to the left, if wages are flexible.

Answer: B Reference:

Explanation:

Type: Multiple Choice Category: Analyze

*7.* The equilibrium quantity of labor increases and the equilibrium wage decreases when:

A. labor demand shifts to the left, if wages are flexible.
B. labor supply shifts to the left, if wages are flexible.
C. labor demand shifts to the right, if wages are flexible.
D. labor supply shifts to the right, if wages are flexible,

Answer: D Reference:

Explanation:

Type: Multiple Choice Category: Analyze

*8.* The equilibrium quantity of labor decreases and the equilibrium wage increases when:

A. labor supply shifts to the left, if wages are flexible.
B. labor demand shifts to the left, if wages are flexible.
C. labor demand shifts to the right, if wages are flexible.
D. labor supply shifts to the right, if wages are flexible,

Answer: A Reference:

Explanation:

Type: Multiple Choice Category: Analyze

*9.* ____________________ will not cause a shift of the AS curve in a Keynesian framework.

A. Prices of inputs
B. Changes in input prices
C. Changes in output prices
D. Changes in inputs

Answer: C Reference:

Explanation:

Type: Multiple Choice

*10.* According to the Keynesian framework, ________________ in __________________ may cause inflation, but not a recession.

A. decrease; interest rates
B. an increase; domestic investment
C. a decrease; a major trading partner’s economy
D. a decrease; a major trading partner’s export prices

Answer: B Reference:

Explanation:

Type: Multiple Choice

*11.* According to the Keynesian framework, ________________________ may cause a recession, but not inflation.

A. a major trading partner’s economic slowdown
B. a decrease in interest rates
C. an increase in domestic investment
D. a decrease in a major trading partners export prices

Answer: A Reference:

Explanation:

Type: Multiple Choice

*12.* According to the Keynesian framework, which of the following may help a country reduce inflation, but will not help that country to get out of a recession?

A. increased spending by the government on health care
B. an increase in taxes on business investments
C. an increase in military spending
D. a decrease in the tax rate on consumer income

Answer: D Reference:

Explanation:

Type: Multiple Choice

*13.* According to the Keynesian framework, which of the following will not help a country to get out of a recession, but may help that country reduce inflation?

A. an increase in military spending
B. a decrease in military spending
C. increase in spending by the government on health care
D. decrease in spending by government on health care

Answer: B Reference:

Explanation:

Type: Multiple Choice

*14.* According to the Keynesian framework, ____________________________ will not help reduce inflation, but may help a country get out of a recession.

A. increased spending by the government on health care
B. increased taxes on business investments
C. decreased military spending
D. increased consumer tax rate

Answer: A Reference:

Explanation:

Type: Multiple Choice

*15.* The Keynesian economic framework is based on an assumption that:

A. an increase in government spending will cause the aggregate demand curve to shift to the left.
B. prices and wages are sticky and do not adjust rapidly.
C. an increase in government spending will cause the aggregate demand curve to shift to the left.
D. people can afford a high level of government services.

Answer: B Reference:

Explanation:

Type: Multiple Choice Category: Remember

*16.* According to the _____________________ argument, a market-oriented economy has no obvious way to implement a plan of systematic wage reductions.

A. sticky wage and price
B. sticky wage
C. Keynesian
D. coordination

Answer: D Reference:

Explanation:

Type: Multiple Choice Category: Remember

*17.* In macroeconomics, what name is given to the costs of changing prices that businesses must consider?

A. opportunity costs
B. internal costs
C. menu costs
D. customer costs

Answer: C Reference:

Explanation:

Type: Multiple Choice Category: Remember

*18.* If a Keynesian expenditure-output model shows that aggregate demand for both goods and labor has shifted to the left to D1, while wages remained at w0 and prices remained at P0, what will be the result?

A. excess supply
B. natural rate of unemployment
C. coordinated wage reductions
D. depression

Answer: A Reference:

Explanation:

Type: Multiple Choice

*19.* When an economy is experiencing higher real interest rates, business firms will most likely be discouraged from investing in:

A. mechanical devices.
B. specialized services.
C. computer or other technologies.
D. tangible and/or intangible capital.

Answer: D Reference:

Explanation:

Type: Multiple Choice Category: Analyze

*20.* The onset of a trade deficit is most likely supported by a country’s:

A. existing trade surplus.
B. strong economic growth.
C. reduction in the balance of trade.
D. increased consumption function.

Answer: B Reference:

Explanation:

Type: Multiple Choice

*21.* According to macroeconomic theory, evidence that high unemployment may be accompanied by low inflation, and low unemployment may be accompanied by high inflation is supported by the:

A. neoclassical expenditure-output model.
B. Keynesian cross diagram.
C. Keynesian Phillips curve tradeoff.
D. Keynesian Inflation trade-off model.

Answer: C Reference:

Explanation:

Type: Multiple Choice

*22.* When the consumption function ordinates MPT 0.2, MPS 0.3, MPI 0.5, and MPC 0.7 are plotted on a graph, what will their values reflect?

A. flatter consumption function due to low marginal propensity to tax
B. steeper consumption function due to low marginal propensity to save
C. flatter consumption function due to high marginal propensity to invest
D. steeper consumption function due to high marginal propensity to consume

Answer: D Reference:

Explanation:

Type: Multiple Choice

*23.* In macroeconomics, a _________________ is used to show the relationship between output and the input price level.

A. Phillips curve
B. microeconomic model
C. expenditure-output model
D. Keynesian framework

Answer: A Reference:

Explanation:

Type: Multiple Choice

*24.* If a Phillips curve shows that unemployment is high and inflation is low in the economy, then that economy:

A. is producing at its potential GDP.
B. is producing at a point where output is more than potential GDP.
C. is producing at a point where output is less than potential GDP.
D. is producing at its equilibrium point.

Answer: C Reference:

Explanation:

Type: Multiple Choice Category: Analyze

*25.* If a Phillip curve shows that unemployment is low and inflation is high in the economy, then that economy:

A. is producing at its potential GDP.
B. is producing at a point where output is more than potential GDP.
C. is producing at a point where output is less than potential GDP.
D. is producing at its equilibrium point.

Answer: B Reference:

Explanation:

Type: Multiple Choice

*26.* The sum of all the income received for contributing resources to GDP is called ___________________.

A. national income (Y)
B. national revenue (Y)
C. marginal income (X)
D. marginal revenue (X)

Answer: A Reference:

Explanation:

Type: Multiple Choice Category: Remember

*27.* In a Keynesian cross diagram, what name is given to the distance between an output level that is below potential GDP and the level of potential GDP?

A. expenditure-output
B. inflationary gap
C. recessionary gap
D. national income (Y)

Answer: C Reference:

Explanation:

Type: Multiple Choice Category: Remember

*28.* In a Keynesian cross diagram, what name is given to the distance between an output level that is below potential GDP and the level of potential GDP?

A. expenditure-output
B. inflationary gap
C. recessionary gap
D. national income (Y)

Answer: C Reference:

Explanation:

Type: Multiple Choice Category: Remember

*29.* Suppose that out of the original 100 increase in government spending, 33 will be recycled back into purchases of domestically produced goods and services in the second round and 10.89 is spent in the third round. Following this multiplier effect, what value would be recycled in the fourth round of this cycle?

A. 3.59
B. 9.89
C. 3.37
D. 5.23

Answer: A Reference:

Explanation:

Type: Multiple Choice

*30.* Suppose that out of the original 100 of government spending, 33 will be recycled back into purchases of domestically produced goods and services in the second round and 10.89 is spent in the third round. Following this multiplier effect, what will the value of the total aggregate expenditures be after the fourth round in the cycle is completed?

A. 141.70
B. 147.48
C. 147.62
D. 144.41

Answer: B Reference:

Explanation:

Type: Multiple Choice

*31.* Suppose that out of the original 100 increase in government spending, 60 will be recycled back into purchases of domestically produced goods and services. Following this multiplier effect, what value will be recycled in the next round in the cycle?

A. 42
B. 3.6
C. 16.66
D. 36

Answer: D Reference:

Explanation:

Type: Multiple Choice

*32.* When the economy is in a recession, the government will want to increase output. If the multiplier equals 2.5 and the government increases spending by 200, how much will output increase by?

A. 100
B. 300
C. 500
D. 900

Answer: C Reference:

Explanation:

Type: Multiple Choice

*33.* The economy is in a recession and the government wants to increase output. If the multiplier equals 3 and the government increases spending by 250, how much will output increase by?

A. 50
B. 100
C. 200
D. 750

Answer: D Reference:

Explanation:

Type: Multiple Choice

*34.* Which of the following is a distinguishing characteristic of a Keynesian cross diagram?

A. real GDP on the horizontal axis
B. a flat line
C. 45-degree line
D. several different Phillips curves

Answer: C Reference:

Explanation:

Type: Multiple Choice

*35.* Which of the following data would be analyzed to determine whether any shift in the MPI has occurred over the course of the past 5 year period?

A. interest rates
B. exchange rates
C. foreign income
D. MPS

Answer: B Reference:

Explanation:

Type: Multiple Choice

*36.* Which of the following will cause the multiplier to be smaller and cause changes in investor confidence to have a smaller effect in an economy?

A. bigger leakages
B. smaller leakages
C. increased trade
D. decreased trade

Answer: A Reference:

Explanation:

Type: Multiple Choice

*37.* Refer to the graph shown below. At point B:

A. economic growth it low or even negative.
B. output is expanding.
C. unemployment is very low.
D. businesses may raise prices.

Answer: A Reference:

Explanation:

Type: Multiple Choice

*38.* Refer to the graph shown below. This graph illustrates a:

A. Keneyesian Curve.
B. Neoclassical Curve.
C. Phillips Curve.
D. Labor Demand Curve.

Answer: C Reference:

Type: Multiple Choice

*39.* Refer to the graph shown below. At point A:

A. economic growth is declining.
B. the economy has full employment.
C. inflation tends to be declining.
D. wages can be lowered due to worker surplus.

Answer: B Reference:

Explanation:

Type: Multiple Choice

*40.* Refer to the graph shown below. Point C in the graph represents:

A. the level Keynesian macroeconomic policy strives for.
B. a moderate growth level in the economy.
C. a moderate level of unemployment in the economy.
D. moderate inflation and all of the above.

Answer: D Reference

Explanation:

Type: Multiple Choice

*41.* The chart below gives the data necessary to make a Keynesian cross diagram. Assume that the tax rate is 0.4 of national income, the MPC out of after-tax income is 0.9, investment is 58, government spending is 60, exports are 40, and imports are 0.1 of after-tax income.

National Income
After-tax income
Consumption
I+G+X
Minus Imports
Aggregate Expenditures
100

104

200

300

400

500

600

What does consumption equal when income equals 600?

1. 104 2. 324 3. 374 4. 540

Answer: C Reference:

Type: Multiple Choice

*42.* The chart below gives the data necessary to make a Keynesian cross diagram. Assume that the tax rate is 0.4 of national income, the MPC out of after-tax income is 0.9, investment is 58, government spending is 60, exports are 40, and imports are 0.1 of after-tax income.

National Income
After-tax income
Consumption
I+G+X
Minus Imports
Aggregate Expenditures
100

104

200

300

400

500

600

What is the equilibrium level of national income for this economy?

1. Y=200 2. Y=300 3. Y=400 4. Y=500

Answer: B Reference:

Type: Multiple Choice

*Essay Questions*

*1. *Soon after the steep recession of 1920–1921, the great economist John Maynard Keynes made a compelling criticism of a macroeconomic argument relating to recessions. Describe the outline Keynes criticized.

John Maynard Keynes criticized the macroeconomic argument that an occasional recession should not cause too much concern, because it will soon be over, and in the meantime, tough economic times create a powerful incentive for firms to become more productive lest they be driven into bankruptcy.

Reference:

Explanation:

Type: Essay

*2. *Identify and briefly describe the main ideas Keynesian economics is based on.

Keynesian economics is based on two main ideas: a) aggregate demand is more likely than aggregate supply to be the primary cause of a short-run economic event like a recession, because aggregate supply usually moves slowly; b) wages and prices can be sticky, and so in an economic downturn unemployment can result.

Reference:

Explanation:

Type: Essay

*3. *Briefly explain what is meant by the term “menu costs” from a macroeconomic perspective.

Menu costs are the costs of changing prices. They include internal costs a business faces in changing prices in terms of labeling, record keeping, and accounting, and also the costs of communicating the price change to customers.

Reference:

Explanation:

Type: Essay

*4. *Identify the discovery made by a British economist in the 1950s and provide a brief explanation of same, including a comparison of the British economic model and the U.S. economic model.

In the 1950s, a British economist named A.W. Phillips discovered the Phillips curve.

A Phillips curve shows the trade-off between unemployment and inflation in an economy. From a Keynesian viewpoint, the Phillips curve should slope down so that higher unemployment means lower inflation, and lower unemployment means higher inflation.

Phillips found that the British data over a 60 year period produced a single downward-sloping Phillips curve. Using U.S. data, over the long-term of several decades, it was difficult to see one single Phillips curve in the macroeconomic data. When the data is separated into short-run periods, several different Phillips curves could be traced out, leading to the conclusion that, in the U.S. economy, the Phillips curve is a short-term relationship that may shift after a few years.

Reference:

Explanation:

Type: Essay

*5. *Contrast the appropriate Keynesian response to an economy experiencing recession with the appropriate Keynesian response to an economy experiencing inflationary pressures.

If an economy is in recession, with an equilibrium at ER, then the Keynesian response would be to enact a policy to shift aggregate demand to the right from ADR toward ADF. If an economy is experiencing inflationary pressures with an equilibrium at EI, then the Keynesian response would be to enact a policy response to shift aggregate demand to the left from ADI toward ADF.

Reference:

Explanation:

Type: Essay

*6. *Identify and briefly describe the model used to explain Keynesian economics up to the 1970s, including its roots, its focus and any benefits. If there are benefits, provide an example.

Keynesian economics was often explained with a different model, known as the expenditure-output approach or the Keynesian cross model. This approach is strongly rooted in the fundamental assumptions of Keynesian economics: it focuses on the total amount of expenditure or demand in the economy, with no explicit mention of aggregate supply or of the price level. This laser-like focus on expenditures in the economy is beneficial because it allows a closer analysis of how shifts in demand or spending affect the rest of the economy; for example, it shows how a tax cut or spending increase of a certain amount, like $10 billion, can have more than $10 billion worth of impact on equilibrium GDP.

Reference:

Explanation:

Type: Essay

*7. *Economists have determined that the economic multipliers for Genovia and Talona are 2.49 and 5.16 respectively. Contrast the economic effects on each of these economies their respective multipliers will have.

Genovia’s economy, with a lower multiplier, is more stable because it is less affected either by economic events or by government policy. Talonia’s economy, with a higher multiplier, is more unstable because economic events or government policy will have a greater affect.

Reference:

Explanation:

Type: Essay

*8. *Discuss the multiplier effect including a description of what it describes in macroeconomic terms, how it is determined and an illustration of how it is defined.

The multiplier effect describes how the impact of an original change in aggregate demand is multiplied as it cycles repeatedly through the economy. The size of the multiplier is determined by three leakages: spending on savings, taxes, and imports. The multiplier is defined as:

Multiplier = Total increase in aggregate expenditures
Original increase in expenditures s

Reference:

Explanation:

Type: Essay

*9. *The government of Talonia has decided to stimulate its economy by increasing is spending during the upcoming fiscal year. The government’s economic advisors have determined that for each 100 in stimulus spending received, 24% will be repaid to the government for taxes, 18% of after-tax income will be saved, 22% will be spent on imports, and the remaining balance will be spent on domestically produced goods and services. Determine what fraction of expenditures is recycled and calculate the value of Talonia’s multiplier.

F= (1-.24)-.1(1-.18)-.22 = 0.458
F = .46

1/(1-.46) = 1/.54 = 1.85

Reference:

Explanation:

Type: Essay

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