Question 1

In the Keynesian model with a fixed price level and a fixed money wage,an increase in the money supply will cause

Accepted Answer

In the Keynesian model, an increase in the money supply leads to an increase in aggregate demand. As a result, output rises, and interest rates fall due to the increase in the supply of loanable funds. The price level, however, does not necessarily fall because it is fixed in this model. Therefore, choice D, output to rise and interest rates to fall, is the correct answer.

Question 2

If the Keynesian model is correct,what should be the correlation between interest rates,the price level,real wages,and output over the business cycle? Provide graphs of the labor market,AD/AS,and IS/LM to illustrate.

Accepted Answer

In the Keynesian model,changes in expectations drive changes in investment,shifting the IS curve and AD to the right.As a result,interest rates,the price level,and income should be positively correlated.In addition,the higher price level reduces the real wage; so real wages should be negatively correlated with income.

Question 3

In the case of an increase in government spending where the price level varies while the money wage is fixed,output

Accepted Answer

In the case of an increase in government spending where the price level varies while the money wage is fixed, output rises and prices fall by more than if the price level was fixed. This is because the increase in government spending leads to an increase in aggregate demand, which shifts the aggregate demand curve to the right. This leads to an increase in output and a decrease in prices. The decrease in prices is greater than it would be if the price level was fixed because the increase in aggregate demand also leads to an increase in the quantity of money demanded. This increase in the quantity of money demanded leads to a decrease in the value of money, which in turn leads to a decrease in prices.

Question 4

Assuming that as a result of observed past increases in the aggregate price level,workers' expectation of the current price level rises.Then,

Accepted Answer

When workers expect higher prices, they perceive their real wages (the purchasing power of their wages) as being lower at current money wage rates, leading them to supply less labor at each money wage. Consequently, firms must offer higher money wages to attract the same quantity of labor, making both A and B correct.

Question 5

In the IS-LM model,the implicit assumption made about aggregate supply was that the

Accepted Answer

The IS-LM model implicitly assumes that the aggregate supply schedule is horizontal because it operates under the assumption that prices are fixed in the short run, allowing output to change in response to demand without affecting the price level.

Question 6

Why is the IS-LM model a model of aggregate demand? Illustrate this using an IS-LM graph.

Accepted Answer

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Question 7

Do workers and firms care more about wage stability or employment stability? Why? Explain what both Keynesian wage theories suggest.

Accepted Answer

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Question 8

If interest rates,prices,and output are all rising,then according to the Keynesian model,these changes must be caused by

Accepted Answer

In the Keynesian model, if interest rates, prices, and output are all rising, this scenario is typically associated with an increase in aggregate demand, which can be represented by a shift up in the IS curve. This shift indicates higher demand for goods and services, leading to increased output and prices, and higher demand for money, which leads to higher interest rates.

Question 9

In addition to consumption being a function of income,suppose that it is also a function of interest rates.Now,lower interest rates make borrowing to consume easier,encouraging overall consumption.

Accepted Answer

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Question 10

In the Keynesian model with both a variable price level and money wage,the aggregate supply function will be

Accepted Answer

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Question 11

In the Keynesian model with a fixed money wage but a flexible price level,an increase in taxes will lower

Accepted Answer

In the Keynesian model, an increase in taxes reduces aggregate demand, leading to lower output and a lower price level. The decrease in demand for money due to lower output also reduces the interest rate.

Question 12

If inflation and unemployment is rising at the same time,then this is most likely the result of a shift

Accepted Answer

When both inflation and unemployment are rising simultaneously, it is indicative of a situation known as stagflation. This phenomenon is most commonly associated with a leftward or downward shift in the aggregate supply schedule. This shift represents a decrease in the total supply of goods and services at every price level, leading to higher prices (inflation) and lower output, which can increase unemployment.

Question 13

What happened to the price level,money wages,real wages,and unemployment during the Great Depression? How would you explain these observations in the Keynesian model? In the Classical model?

Accepted Answer

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Question 14

Suppose the government want to increase aggregate demand without increasing interest rates.You would recommend

Accepted Answer

Increasing government spending and the money supply would increase aggregate demand without increasing interest rates. This is because government spending directly injects money into the economy and increases aggregate demand, while increasing the money supply provides more liquidity in the economy and encourages more spending. Option A is incorrect because reducing transfer payments would decrease household income and demand, while increasing the money supply would decrease interest rates, potentially leading to inflation. Option B is incorrect because reducing the money supply would decrease liquidity in the economy and reduce spending, while increasing government spending without increasing the money supply would put pressure on interest rates. Option C is incorrect because increasing taxes would decrease household income and demand, while increasing the money supply would decrease interest rates, potentially leading to inflation.

Question 15

If the classical model is correct,what should be the correlation between interest rates,the price level,real wages,and output over the business cycle? Provide graphs of the labor market,AD/AS,and IS/LM to illustrate.

Accepted Answer

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Question 16

In the Keynesian model with a variable money wage and variable price level,an increase in the money supply lead to a rise in all of the following except

Accepted Answer

In the Keynesian model with a variable money wage and variable price level, an increase in the money supply leads to an increase in output, the level of employment, and the price level. However, the real wage, which is the nominal wage adjusted for inflation, will not necessarily increase. In fact, with an increase in the money supply, there may be upward pressure on prices, which may then offset any increase in the nominal wage, resulting in a decrease in the real wage.

Question 17

During the recession of 1990-1991,interest rates in the U.S.dropped by nearly two percentage points while output rose and inflation fell.Can you explain this result in the Keynesian model? Show your explanation graphically using the IS-LM and AD-AS models.

Accepted Answer

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Question 18

An increase in price expectations in the Keynesian model will shift

Accepted Answer

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Question 19

Cite the difference(s)between the classical and Keynesian aggregate demand schedules.What things shift aggregate demand in the classical model? What things shift aggregate demand in the Keynesian model?

Accepted Answer

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Question 20

What is the key difference between the classical and Keynesian aggregate supply functions? What is the key factor that drives these differences?

Accepted Answer

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Quiz 8: Keynesian System Iv: Aggregate Supply and Demand