Question 1

Which of the following statements about Keynesian views is true?

Accepted Answer

Keynes believed that government had a responsibility to boost demand in times of demand deficient output to maintain full employment in the short term. He believed that markets were not always efficient and that they could suffer from prolonged periods of low output and high unemployment. Keynes also believed that his analysis was mainly concerned with the short run, rather than the long run. He did not think that responsibility for fiscal policy should be transferred to central banks, as governments could provide more effective macroeconomic management.

Question 2

The LM curve connects points where the money market is in equilibrium and the demand for money is equal to the supply of money at different interest rates.

Accepted Answer

This is an accurate description of the LM curve.

Question 3

John Maynard Keynes' General Theory was an attempt to explain how economies operate at equilibrium in the long run.

Accepted Answer

John Maynard Keynes' General Theory was an attempt to explain how economies operate in the short run and can become stuck in a state of disequilibrium, with high unemployment and low economic activity.

Question 4

A deflationary gap exists when there is a difference between the price level in an economy and a fall in the level of national income.

Accepted Answer

The answer of A deflationary gap exists when there is...

Question 5

The IS curve measures points where the inflation rate and national income are the same.

Accepted Answer

The IS curve measures points where the interest rate and national income are the same, not the inflation rate.

Question 6

If the economy was in equilibrium where an inflationary gap existed then Keynes would argue that governments should cut public spending and increase taxation to reduce the expenditure line to reduce the gap.

Accepted Answer

The answer of If the economy was in equilibrium where...

Question 7

If the marginal propensity to consume in the economy is 0.8 and the government increases its spending this year by R10 billion, what will be the additional increase in expenditure in the economy next year?

Accepted Answer

The additional increase in expenditure in the economy next year will be the multiplier effect of the government spending. The multiplier is equal to 1/(1-MPC). In this case, the multiplier will be 1/(1-0.8) = 5. Therefore, the additional increase in expenditure next year will be 5 times the initial government spending of R10 billion, which equals R50 billion. However, the question asks for the additional increase, not the total increase. Therefore, the answer is R50 billion - R10 billion = R40 billion. To find the annual increase, we divide the additional increase by the number of years, which is 1. Therefore, the annual increase in expenditure next year will be R40 billion. However, the question asks for the additional increase in expenditure next year, which is the same as the annual increase. Therefore, the answer is R8 billion (R40 billion divided by 5).

Question 8

Keynes believed that a key element of unemployment was a deficiency in the level of aggregate demand which governments could and should rectify.

Accepted Answer

This is a key tenet of Keynesian economics, that unemployment can be tackled by increasing government spending and boosting aggregate demand.

Question 9

Refer to Figure 1 below.If the vertical distance labelled Z represents a deflationary gap then which of the following statements is true? Figure 1

Accepted Answer

The answer of Refer to Figure 1 below.If the vertical...

Question 10

A deflationary gap occurs because

Accepted Answer

A deflationary gap occurs when the level of expenditure in an economy is less than that needed to maintain full employment output. This means that there is not enough demand for goods and services to fully utilize all the resources available in the economy, leading to unemployment and lower production levels.

Question 11

A key element of Keynesian analysis relates to:

Accepted Answer

Keynesian analysis emphasizes the difference between planned and actual spending and investment, focusing on how discrepancies can lead to economic fluctuations.

Question 12

Which of the following statements about the 45 degree line is true?

Accepted Answer

The 45 degree line represents the equilibrium where national income (Y) equals aggregate expenditure (C + I + G), with no unplanned inventory accumulation. When C = Y, this implies that consumption spending (C) equals national income (Y). Therefore, the 45 degree line connects all points where consumption spending would equal national income.

Question 13

In the Keynesian cross diagram the 45 degree line

Accepted Answer

The 45 degree line (also known as the line of equality) in the Keynesian cross diagram represents all points where national income is equal to aggregate expenditure. Specifically, it connects all points where consumption spending (which is a component of aggregate expenditure) is equal to national income. Therefore, choice C is correct.

Question 14

The government increases spending by R10 billion during a time of economic slowdown when output is less than full employment output.The marginal propensity to withdraw is 0.9.What is the value of the multiplier?

Accepted Answer

The multiplier is calculated using the formula: K = 1 / (1 - MPC). In this case, MPC = 0.9, so K = 1 / (1 - 0.9) = 10. Therefore, the answer is D.

Question 15

Planned spending includes the intended or desired spending by households and firms in the economy.

Accepted Answer

Planned spending refers to the planned or intended spending by households and firms, which includes both consumption and investment spending in the economy.

Question 16

On a Keynesian cross diagram, the 45 degree line connects all points where consumption spending would be equal to national income.

Accepted Answer

The 45 degree line represents the line where national income equals aggregate expenditure, which includes consumption spending. Therefore, any points on this line represent situations where consumption spending would be equal to national income.

Question 17

What was John Maynard Keynes's primary message concerning recessions and depressions?

Accepted Answer

Keynes argued that recessions and depressions can occur as a result of inadequate demand for goods and services in the economy. He believed that government intervention could help to stimulate aggregate demand and bring the economy out of a recession or depression.

Question 18

The IS curve will be flatter the more responsive consumption and investment are to changes in interest rates.

Accepted Answer

The slope of the IS curve depends on the responsiveness of consumption and investment to changes in interest rates. If consumption and investment are more responsive, the IS curve will be flatter (less steep). Conversely, if consumption and investment are less responsive, the IS curve will be steeper.

Question 19

An increase in the demand for money causes a shift of the demand for money curve to the right and a movement along the LM curve reflecting a higher interest rate and level of national income.

Accepted Answer

An increase in the demand for money would shift the demand for money curve to the right, leading to a higher interest rate to reach the new equilibrium point on the LM curve, resulting in a higher level of national income.

Question 20

The multiplier model implies that

Accepted Answer

The multiplier model suggests that changes in autonomous spending (including government spending) will lead to a larger increase in national income than the initial increase in spending. This is because the increase in spending leads to an increase in income, which in turn leads to an increase in consumption and further increases in income. This process continues until leakages (savings, taxes, imports) eventually reduce the impact of the initial increase in spending. Therefore, option B is the correct answer. Options A, C, D, and E are incorrect.

Quiz 14: Keynesian Economics and the Is-Lm Analysis