Deck 8: The Keynesian Model

Question 1

The school of thought that emphasizes the natural tendency for an economy to move toward equilibrium full employment is known as the:

A)Keynesian school.
B)supply-side school.
C)rational expectations school.
D)classical school.

Answer 1

classical school.

Question 2

The classical economists argued that the production of goods and services (supply)generates an equal amount of total income and, in turn, total spending. This theory is called:

A)Keynes' General Theory.
B)Say's Law.
C)the "animal spirits" theory.
D)the law of autonomous consumption.

Answer 2

Say's Law.

Question 3

Keynes once remarked that, in the long run, we're all dead. He was responding to the conventional wisdom of classical economics who argued that:

A)the supply curve should remain vertical in the long run.
B)World War I was fought to free Britain from economic ruin.
C)depression was only a short-run, temporary departure from full-employment equilibrium.
D)funeral plots need to be determined by the market.
E)market-based realities cause the estate tax to be too high.

Answer 3

depression was only a short-run, temporary departure from full-employment equilibrium.

Question 4

The popular theory prior to the Great Depression that the economy will automatically adjust to achieve full employment in the long run is:

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

Question 5

The hands-off view of the classical school rests on which of the following two simple propositions about markets?

A)Demand creates its own supply and markets are basically competitive.
B)Industrial policy is inevitable and all prices are flexible.
C)Market failure occurs and prices are rigid.
D)Wages are sticky downward and market failure is inevitable.
E)Markets are basically competitive and prices are flexible.

Question 6

Which of the following statements is true about Say's law?

A)It states that supply creates its own demand.
B)It states that demand creates its own supply.
C)It states that total output will always exceed total spending.
D)It states that consumption spending is the most volatile component of aggregate expenditures.
E)It is a major proposition of the Keynesian model.

Question 7

According to the classical economists, which of the following would make prolonged unemployment impossible?

A)Flexible prices, wages, and interest rates.
B)Activist government policies.
C)Stable investment demand.
D)A steadily growing money supply.

Question 8

Prior to the Great Depression, classical economists believed that a recessionary downturn would be reversed by:

A)higher wages and prices.
B)lower wages and prices.
C)an expansionary monetary policy on the part of the Federal Reserve System.
D)an increase in government spending that would stimulate aggregate demand.

Question 9

The French economist Jean-Baptiste Say transformed the equality of total output and total spending into a law that can be expressed as follows:

A)Unemployment is not possible in the short run.
B)Demand and supply are never equal.
C)Supply creates its own demand.
D)Demand creates its own supply.

Question 10

The dominant school of economic thought until midway through the Great Depression of the 1930s was:

A)classical.
B)Keynesian.
C)monetarism.
D)supply-side.
E)rational expectations.

Question 11

Classical economic theory predicted that in the long run the economy would experience:

A)below full unemployment.
B)rising rate of inflation.
C)full employment.
D)idle factors of production.

Question 12

The Keynesian view stresses that:

A)demand creates its own demand.
B)there is direct relationship between consumer spending and disposable income.
C)when aggregate expenditures (demand)can be forever less than full-employment output therefore prolonged unemployment will persist.
D)all of these are true.

Question 13

If the economy were left on its own without the interference of government or the Fed, it would move toward an equilibrium rate of growth that would produce, with only minor interruptions, full employment without inflation. What school supports this view?

A)Classical.
B)Keynesian.
C)Monetarism.
D)Supply-side.
E)Neo-Keynesian.

Question 14

The most appropriate countercyclical policy, or stabilization policy, in times of unemployment, according to classical economists, is for the government to:

A)increase the minimum wage.
B)impose wage and price controls.
C)stimulate aggregate demand.
D)cut taxes.
E)do nothing.

Question 15

According to Say's law, there cannot be overproduction of goods and services because:

A)planned aggregate expenditures sometimes fall short of total output.
B)prices and wages are "sticky" or inflexible in the downward direction.
C)demand creates its own supply.
D)supply creates its own demand.

Question 16

According to the Keynesian view, the prolonged unemployment of the Great Depression:

A)was surprising because Keynesians believed that wage rates would decline and direct the economy to full employment.
B)was surprising because Keynesians believed that lower interest rates would direct the economy to full employment.
C)resulted because the total expenditures on goods and services were less than the full-employment rate of output.
D)resulted because the federal government ran large budget deficits during the 1930s.

Question 17

Classical economists believed that:

A)price flexibility automatically directs market economies to full employment.
B)budget deficits and surpluses were necessary for the control of economic fluctuations.
C)market economies suffer prolonged periods of recessions and depressions.
D)market economies are inherently unstable because of fluctuating aggregate demand.

Question 18

John Maynard Keynes and his followers argued that the Great Depression was primarily the result of:

A)excessive government spending.
B)large budget deficits.
C)the perverse monetary policies of the Fed.
D)insufficient aggregate spending on goods and services.

Question 19

In the view of the classical school, unemployment:

A)is a permanent condition.
B)disappears when everyone who is willing to work at the equilibrium wage finds employment.
C)exists because people do not interfere with the competitive process.
D)is only temporary because all wages and prices are rigid.
E)is necessary and good for the economy.

Question 20

The dominant school of thought prior to the 1930s was known as the:

A)Keynesian school.
B)classical school.
C)rational expectations school.
D)supply-side school.
E)monetarist school.

Question 21

In the Keynesian aggregate expenditure model, the 45-degree line indicates:

A)amounts households plan to spend at each possible level of income.
B)amounts households plan to save at each possible level of income.
C)all income levels at which the planned spending of decision makers equals total output.
D)all income levels at which the marginal propensity to consume is one.

Question 22

Consider the Keynesian consumption function. If disposable income is greater than the break-even level of disposable income, then households will be:

A)investing.
B)borrowing.
C)dissaving.
D)saving.

Question 23

A primary emphasis of the Keynesian school is the economy:

A)has a tendency to always create a full-employment level of output.
B)has a tendency to always create inflationary pressure at all levels of output.
C)has a tendency to eliminate unemployment by lowering wage rates to create an equilibrium in the labor market.
D)is driven by the supply-side of the market.
E)has a tendency to be in equilibrium at less than full employment.

Question 24

The consumption function expresses the:

A)relation between consumption and dissaving.
B)relation between consumption and disposable personal income.
C)purposes of consumption.

Question 25

According to Keynes, what is the most important determinant of households' spending on goods and services?

A)The price level.
B)The interest rate.
C)Autonomous consumption.
D)Disposable income.

Question 26

The consumption function shows the relationship between:

A)planned consumption expenditures and disposable income.
B)permanent income and savings.
C)business inventory and real GDP.
D)aggregate demand and aggregate consumption.

Question 27

In the basic Keynesian model, the major determinant of consumption expenditures is:

A)the interest rate.
B)inflation.
C)investment.
D)disposable income.

Question 28

At the point where the consumption function crosses the 45-degree line:

A)consumption is equal to disposable income, and therefore, saving is zero.
B)consumption is less than income, and saving is present.
C)consumption is greater than income, and dissaving is present.
D)planned saving equals actual saving minus disposable income.

Question 29

The consumption function has a slope less than one because:

A)as disposable income increases, the real rate of interest will decline.
B)saving and consumption are equal at all levels of income.
C)as disposable income increases, consumption expenditures increase by an amount less than the increase in income.
D)as disposable income increases, consumption expenditures increase by an amount greater than the increase in income.

Question 30

The value of consumption at each level of disposable personal income, all other determinants of consumption unchanged, is shown by the:

A)aggregate dissaving curve.
B)consumption function.
C)investment schedule.
D)savings function.

Question 31

Keynesians:

A)accept the countercyclical policy of doing nothing, that is, allowing market forces to work.
B)believe that the level of aggregate demand in the 1930s was sufficient to generate full employment.
C)accept the fact that policymakers should eliminate inflation first before focusing on unemployment.
D)focus on increasing aggregate demand in order to stimulate the economy.
E)were prepared for the events that beset our economy in the 1970s and 1980s.

Question 32

The consumption function shows the relationship between consumer expenditures and:

A)the interest rate.
B)the tax rate.
C)savings.
D)disposable income.

Question 33

According to John Maynard Keynes:

A)aggregate expenditures (demand)can be forever inadequate to achieve full employment.
B)aggregate output (supply)can be forever inadequate to achieve full employment.
C)the economy would automatically adjust to full employment in the long run.
D)neither aggregate demand nor aggregate supply is a determinant of full-employment real GDP.

Question 34

If the economy is experiencing less than full-employment, the Keynesian school recommends that the government:

A)do nothing to stimulate the economy.
B)undertake fiscal policy to stimulate aggregate demand.
C)undertake fiscal policy to stimulate aggregate supply.
D)balance the budget to stimulate aggregate demand.

Question 35

Keynesian economics:

A)affirms the classical economists' basic premise concerning competitive markets.
B)believes that monopolies and unions tend to be permanent fixtures in our economy and the prices they create tend to be flexible, at least downwardly.
C)emphasizes the possibility that an economy can never be in equilibrium at less than full employment.
D)prefers to emphasize aggregate supply over aggregate demand.
E)believes that unemployment results when aggregate demand is insufficient to reach a full-employment level of real GDP.

Question 36

What is the title of the John Maynard Keynes's book published in 1936 that challenged the classical self-correction economic theory?

A)In the Long-run We Are Dead .
B)Classical Economics Revised .
C)General Theory of Employment, Interest, and Money .
D)A Keynesian Approach to Economic Policy .

Question 37

A movement along the consumption function is caused by a change in:

A)the price level.
B)autonomous consumption.
C)real disposable income.
D)the stock of durable goods.

Question 38

In the Keynesian aggregate consumption-income graph, the vertical distance between the consumption function and the 45-degree line shows the:

A)amount of savings (or dissavings)at that level of disposable income.
B)amount of disposable income at that level of consumption.
C)increase in planned business investment at each level of inflation.
D)increase in income that causes each change in real GDP.

Question 39

The Keynesian model of macro equilibrium provided an explanation for the:

A)high rates of both unemployment and inflation experienced during the 2110s.
B)prolonged high rates of unemployment experienced during the 1930s.
C)low interest rates of the 1950s and 1960s.
D)budget surpluses and rapid growth of the U.S. economy during the 1990s.

Question 40

A movement along the consumption function is caused by a change in:

A)consumption.
B)expectations.
C)aggregate supply.
D)disposable income.

Question 41

Which one of the following changes is consistent with a change in an economy's consumption function from C = $500 billion + 0.80Y to C = $700 billion + 0.80Y?

A)An increase in disposable income taxes.
B)An increase in interest rates
C)A decrease in permanent disposable income.
D)An increase in wealth.
E)An increase in savings.

Question 42

\If the interest rate increases, then the:

A)economy will move to a new point along the existing consumption function.
B)consumption function will shift up.
C)consumption function will shift down.
D)investment demand curve will shift up.
E)economy will move to a new point along the existing investment demand curve.

Question 43

The consumption function will shift upward if real asset and money holdings:

A)increase, if people expect prices to increase, if interest rates decrease, and if taxes decrease.
B)increase, if people expect prices to increase, if interest rates increase, and if taxes increase.
C)increase, if people expect prices to increase, if interest rates increase, and if taxes decrease.
D)decrease, if people expect prices to decrease, if interest rates decrease, and if taxes decrease.
E)decrease, if people expect prices to increase, if interest rates increase, and if taxes decrease.

Question 44

In the consumption function, consumption is caused by changes in the:

A)price level.
B)level of disposable income.
C)interest rate.
D)level of investment.
E)level of real assets.

Question 45

The consumption function shows the relationship between consumption and:

A)interest rates.
B)saving.
C)price level changes.
D)disposable income.

Question 46

If people expect prices to fall in the future,

A)their consumption function in the present will shift downward.
B)their consumption function in the present will shift upward.
C)their consumption function in the present will be unchanged.
D)they will increase their current levels of consumption by moving up along their consumption functions.
E)they will decrease their current levels of consumption by moving down along their consumption functions.

Question 47

Which of the following will shift the consumption function upward?

A)An increase in consumer wealth.
B)An increase in the interest rate.
C)An increase in personal income taxes.
D)A decrease in the MPC.
E)An increase in disposable income.

Question 48

Which one of the following will shift the consumption function upward?

A)Higher interest rates.
B)An increase in real assets.
C)Expectations of future economic growth.
D)Lower capacity utilization rates.
E)A tax increase.

Question 49

Given the consumption function C = $500 billion + 0.80Y, an increase in disposable income from $6,000 billion to $7,000 billion will cause consumption to increase by:

A)$800 billion.
B)$1,000 billion.
C)$1,300 billion.
D)$1,500 billion.
E)$1,800 billion.

Question 50

Which of the following statements is true concerning the consumption function?

A)It slopes upward.
B)Its slope equals the MPC.
C)It represents the direct (positive)relationship between consumption spending and the level of real disposable income.
D)If the consumption function lies above the 45-degree line then saving is positive.
E)All of these.

Question 51

If people's real assets increase, then the:

A)economy will move to the right along the existing consumption function.
B)economy will move to the left along the existing consumption function.
C)consumption function will shift down.
D)consumption function will shift up.
E)investment demand curve will shift up.

Question 52

A movement along a consumption function is caused by:

A)a change in households' real assets.
B)a change in interest rates.
C)changes in taxation policy.
D)expectations of price changes.
E)changes in households' disposable incomes.

Question 53

The relationship between consumption and disposable income is the:

A)spending function.
B)consumption function.
C)autonomous consumption.
D)household consumer spending
E)household spending function.

Question 54

The relationship between consumer expenditures and disposable income is the:

A)savings function.
B)the tax rate function.
C)disposable income function.
D)consumption function.

Question 55

A movement along in the consumption function is caused by a change in:

A)real disposable income.
B)can be caused by a change in the price level.
C)the marginal propensity to consume (MPC).
D)none of these.

Question 56

Which of the following events would produce an upward shift in the consumption function, other things being equal?

A)An increase in consumer wealth.
B)A decrease in consumer wealth.
C)A decrease in autonomous consumption.
D)Both b and c.

Question 57

The consumption function will shift for all of the following reasons except:

A)a change in a household's real assets.
B)a change in interest rates.
C)expectations of price changes.
D)changes in a household's disposable incomes.
E)changes in taxation policy.

Question 58

Economists refer to the simple relationship between consumption and disposable income as:

A)autonomous consumption.
B)the marginal propensity to consume.
C)the absolute disposable income hypothesis.
D)disposable income.
E)the consumption function.

Question 59

Which one of the following will shift the consumption function upward?

A)Higher interest rates.
B)Expectations that the economy will grow in the future.
C)A decrease in money holdings.
D)Higher capacity utilization rates.
E)A tax increase.

Question 60

Which one of the following will shift the consumption function downward?

A)An increase in disposable income.
B)A decrease in disposable income.
C)Legislation making credit harder to obtain.
D)Lower tax rates.
E)A technological breakthrough.

Question 61

If disposable income is $400 billion, autonomous consumption is $60 billion, and MPC is 0.8, what is the level of saving?

A)$20 billion.
B)$210 billion.
C)$380 billion.
D)$590 billion.
E)$780 billion.

Question 62

If disposable income is $400 billion, consumption spending is $380 billion, and MPC is 0.5, what is the level of saving?

A)$20 billion.
B)$210 billion.
C)$380 billion.
D)$590 billion.
E)$780 billion.

Question 63

At the point where the disposable income line intersects the consumption function, saving:

A)equals consumption.
B)equals disposable income.
C)is less than zero.
D)is equal to zero.

Question 64

For any given consumption function, autonomous consumption is equal to the level of consumption associated with:

A)negative disposable income.
B)positive disposable income.
C)zero disposable income.
D)unstable disposable income.

Question 65

If income increases from $110,000 to $120,000 and consumption from $108,000 to $114,000, the marginal propensity to consume is:

A)0.40.
B)0.60.
C)0.94.
D)1.60.

Question 66

The vertical intercept of the consumption function that represents the portion of consumption expenditure not associated with a level of disposable income is known as:

A)zero income intercept.
B)disposable income intercept.
C)autonomous consumption.
D)automatic consumption line.

Question 67

That part of disposable income not spent on consumption is:

A)saved.
B)invested.
C)wasted.
D)borrowed.

Question 68

If Y = $500 billion, autonomous consumption = $300 billion, and the marginal propensity to save = 0.20, then saving will equal:

A)- $200 billion.
B)$200 billion.
C)- $100 billion.
D)$100 billion.
E)$40 billion.

Question 69

Which of the following will shift the consumption function upward?

A)A tax increase.
B)Higher capacity utilization rates.
C)Higher disposable income.
D)Lower wealth holdings.
E)Expectations of inflation.

Question 70

Autonomous consumption is consumption that:

A)varies directly with disposable income.
B)varies inversely with disposable income.
C)is independent of the level of disposable income.
D)is constant at first and then varies with disposable income.

Question 71

If, for a given disposable income level, the disposable income line lies above the consumption curve, saving:

A)equals consumption.
B)equals disposable income.
C)is less than zero.
D)is equal to zero.
E)is greater than zero.

Question 72

If consumption spending is larger than disposable income,

A)saving is positive.
B)dissaving occurs.
C)saving is exactly zero.
D)a depression results.
E)this cannot occur.

Question 73

Given the consumption function C = $100 billion + 0.75 ($300 billion), autonomous consumption is equal to:

A)$100 billion.
B)$225 billion.
C)$300 billion.
D)$325 billion.
E)$400 billion.

Question 74

If Y = $500 billion, autonomous consumption = $400 billion, and the marginal propensity to save = 0.20, then saving will equal:

A)- $300 billion.
B)$300 billion.
C)$0.
D)$80 billion.
E)- $80 billion.

Question 75

Consumption spending that is independent of the level of disposable income is known as:

A)marginal consumption.
B)transitory consumption.
C)permanent consumption.
D)relative consumption.
E)autonomous consumption.

Question 76

If, for a given disposable income level, the disposable income line lies below the consumption curve, saving:

A)equals consumption.
B)equals disposable income.
C)is less than zero.
D)is equal to zero.
E)is greater than zero.

Question 77

That part of disposable income not spent on consumption is defined as:

A)transitory disposable income.
B)permanent disposable income.
C)disposable income.
D)autonomous consumption.
E)saving.

Question 78

Autonomous consumption spending is consumption spending:

A)that is dependent on changes in disposable income.
B)on durable goods.
C)that causes the MPC to rise.
D)that is independent of the level of disposable income.
E)that causes the MPC to fall.

Question 79

Autonomous consumption is equal to the level of consumption associated with:

A)unstable disposable income.
B)positive disposable income.
C)zero disposable income.
D)negative disposable income.

Question 80

When economists say that private investment is "autonomous," they mean that it:

A)will never change.
B)is not dependent on the current level of disposable income.
C)is determined by the "animal spirits" of business decision makers.
D)is determined by the level of saving.