Question 1

To explain the existence of excess capacity, Keynes argued that
A)prices and wages are flexible, and eventually markets would go back to equilibrium.
B)the long run average cost curve should not occur at the full employment level.
C)the aggregate demand curve can be manipulated by advertising.
D)prices and wages are inflexible in the downward direction.

Accepted Answer

Keynes argued that excess capacity exists because prices and wages are inflexible in the downward direction, preventing markets from clearing.

Question 2

Q: How many economists does it take to change a light bulb?
A: All. Because then you will generate employment, more consumption, moving the aggregate demand curve to the right.
This joke represents the view of
A)classical economists.
B)Keynesian economists.
C)economists who contend that money illusion never occurs.
D)economists who conclude that wages and prices are very flexible.

Accepted Answer

This joke represents the Keynesian view that government intervention and increased aggregate demand can help stimulate the economy and create jobs. Classical economists, on the other hand, would argue for a laissez-faire approach and minimal government intervention in the economy. The other choices are not relevant to the joke.

Question 3

The Keynesian contention that the short-run aggregate supply curve is horizontal is based on the assumption that there are
A)sticky prices.
B)flexible prices.
C)real prices.
D)upward sloping prices.

Accepted Answer

The Keynesian contention that the short-run aggregate supply curve is horizontal is based on the assumption of sticky prices, where prices do not adjust immediately to changes in demand or supply. This means that in the short-run, changes in aggregate demand will have a greater impact on output and employment, rather than prices.

Question 4

Which one of the following statements is TRUE?
A)The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the classical model.
B)The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the Keynesian model.
C)The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the idea that increases in aggregate demand will increase the price level but will leave real GDP unchanged.
D)The actual behavior of prices and real GDP during the decade of the 1930s is consistent with a vertical short-run aggregate supply curve.

Accepted Answer

The actual behavior of prices and real GDP during the 1930s is inconsistent with the classical model, which assumes that the economy will self-correct in the face of downturns. Similarly, the actual behavior of prices and real GDP during the 1930s is not consistent with the idea that increases in aggregate demand will increase the price level but leave real GDP unchanged, as output fell significantly during this time. The actual behavior of prices and real GDP during the 1930s is consistent with the Keynesian model, which highlights the importance of government intervention to stabilize the economy during periods of recession. Additionally, the actual behavior of prices and real GDP during the decade of the 1930s is inconsistent with a vertical short-run aggregate supply curve, as this implies that changes in aggregate demand have no effect on output in the short run, which is not consistent with the contractionary period experienced during the Great Depression.

Question 5

The short-run aggregate supply curve is a relationship between
A)unemployment and real GDP.
B)inflation and time.
C)real GDP and price level.
D)capital goods and consumer goods.

Accepted Answer

The short-run aggregate supply curve is a relationship between real GDP and price level. It shows the quantity of goods and services that firms are willing and able to supply at different price levels in the short run, assuming all other factors such as input prices and productivity remain constant. The curve slopes upward because as price levels increase, firms are incentivized to increase production to meet the higher demand and earn more profits.

Question 6

If the economy is operating at a point at which short-run aggregate supply is horizontal, then
A)real GDP cannot expand.
B)real GDP cannot contract.
C)increases in aggregate demand do not increase the price level.
D)then increases in aggregate demand do not increase real GDP.

Accepted Answer

If the short-run aggregate supply is horizontal, it means that the economy is producing at full capacity and any increase in aggregate demand would only result in an increase in output without affecting the price level. This is because firms can increase production without incurring any additional costs, leading to an overall increase in real GDP. Therefore, option C is correct. Option A and B are incorrect because a horizontal short-run aggregate supply curve implies that the economy is already producing at its potential output level and any increase or decrease in output is not possible. Option D is incorrect because an increase in aggregate demand will lead to an increase in real GDP when the short-run aggregate supply curve is horizontal.

Question 7

In the Keynesian model which includes the Keynesian short-run aggregate supply curve
A)an increase in aggregate demand would causes the price level to rise, but does not change the level of real GDP.
B)an increase in aggregate demand causes real GDP to rise without changing the price level.
C)an increase in aggregate demand changes neither the price level nor the level of real GDP.
D)an increase in aggregate demand causes real GDP and the price level to decrease.

Accepted Answer

In the Keynesian model, in the short-run, the nominal wage rate is fixed, so an increase in aggregate demand will lead to an increase in output (real GDP) since firms will increase production to meet the higher demand. However, since the nominal wage rate is fixed, prices will not immediately rise to reflect the increase in demand, leading to an increase in real GDP without an increase in the price level. This implies that the economy can temporarily produce more output without experiencing inflation.

Question 8

Keynesian economists argue that
A)equilibrium real GDP is demand-determined.
B)equilibrium real GDP is supply-determined.
C)equilibrium real GDP can be reached only in a theoretical economy.
D)reaching equilibrium real GDP always results in inflation.

Accepted Answer

Keynesian economists believe that equilibrium real GDP is determined by aggregate demand, and can shift due to changes in consumption, investment, government spending, and net exports. This is in contrast to classical economists who argue that equilibrium GDP is supply-determined, and determined by factors such as technology, labor, capital, and natural resources. Keynesians also believe that in the short run, reaching equilibrium GDP may not result in inflation, as there may be unused resources and idle labor that can be put to work without driving up prices.

Question 9

The approach to understanding the determination of real GDP and the price level that emphasizes incomplete adjustment in the prices of many goods is
A)the classical model.
B)the Keynesian model.
C)Say's law.
D)the aggregate demand model.

Accepted Answer

The Keynesian model emphasizes incomplete price adjustment, as it assumes that prices and wages are sticky in the short run. In contrast, the classical model assumes that prices and wages are flexible and adjust quickly, and that markets continuously clear. Say's law refers to the idea that supply creates its own demand, while the aggregate demand model focuses on the relationship between aggregate demand and output and prices in the short run.

Question 10

According to Keynes
A)the short-run aggregate supply curve is vertical.
B)nominal wages and/or prices are sticky.
C)money illusion does not exist.
D)markets are perfectly competitive.

Accepted Answer

According to Keynes, nominal wages and/or prices are sticky in the short run, meaning that they do not adjust immediately to changes in demand or supply. This leads to a horizontal short-run aggregate supply curve. Option A is incorrect, as the short-run aggregate supply curve is horizontal, not vertical, according to Keynes. Option C is also incorrect as Keynes believed that money illusion exists, whereas option D is incorrect as Keynes did not assume markets to be perfectly competitive.

Question 11

The Keynesian short-run aggregate supply curve is demonstrated graphically as a
A)vertical line.
B)horizontal line.
C)upward sloping curve.
D)downward sloping curve.

Accepted Answer

The Keynesian short-run aggregate supply curve is depicted as a horizontal line, indicating that prices do not change as demand increases or decreases in the short run.

Question 12

Which of the following is a basic difference between the classical model and the Keynesian model in which the Keynesian short-run aggregate supply curve exists?
A)The classical model assumes that the long run aggregate supply curve is vertical, while the Keynesian model assumes the long run aggregate supply curve is horizontal.
B)The classical model assumes that the position of the long run aggregate supply curve is determined by full employment, while the Keynesian model assumes that the long run aggregate supply curve will be to the left of full employment.
C)The classical model assumes that the level of real GDP is supply determined, while the Keynesian model assumes that it is demand determined.
D)The classical model uses real GDP, while the Keynesian model uses nominal GDP.

Accepted Answer

The classical model posits that the level of real GDP is determined by supply-side factors (such as productivity and labor supply), assuming that markets, including labor markets, always clear through price and wage adjustments. The Keynesian model, on the other hand, suggests that in the short run, the level of real GDP is determined by demand-side factors (such as consumption, investment, and government spending), highlighting that prices and wages can be sticky, leading to periods of unemployment and underutilized resources.

Question 13

The Keynesian short-run aggregate supply curve is horizontal because
A)it represents the full employment level of real GDP.
B)it reflects the absence of money illusion.
C)it reflects wage and price inflexibility.
D)it represents Say's law.

Accepted Answer

The Keynesian short-run aggregate supply curve is horizontal because it reflects wage and price inflexibility, meaning that in the short run, prices and wages do not adjust quickly to changes in demand, allowing for increases in aggregate demand to affect output without changing the price level.

Question 14

Which one of the following statements is TRUE?
A)The classical model cannot explain periods of prolonged unemployment.
B)The Keynesian model cannot explain periods of prolonged unemployment.
C)The Keynesian model assumes complete flexibility of wages and prices.
D)The Keynesian model shows that the level of real GDP is supply-determined.

Accepted Answer

The classical model assumes that the economy will always return to full employment equilibrium in the long run, but prolonged periods of unemployment have been observed in reality.

Question 15

The short-run aggregate supply curve is horizontal if
A)resources were fully utilized.
B)there are unutilized resources in the economy.
C)resources are perfectly adaptable between production processes.
D)there are high inflation rates.

Accepted Answer

The short-run aggregate supply curve is horizontal when there are unutilized resources in the economy, indicating that increases in demand can lead to increases in output without leading to higher prices. This is because the economy can increase production using these unutilized resources without the need to increase prices.

Question 16

In the Keynesian model in which the Keynesian short-run aggregate supply curve exists
A)the short-run aggregate supply curve determines real GDP.
B)the aggregate demand curve determines the price level.
C)unemployment cannot persist for long periods of time.
D)aggregate demand determines real GDP per year.

Accepted Answer

In the Keynesian model, the short-run aggregate supply curve is typically horizontal at low levels of output, indicating that prices do not change as demand increases or decreases. This means that the level of real GDP (or output) per year is determined by the level of aggregate demand, not by the supply curve. This is because, in the short run, firms are willing to produce more at the same price level if demand increases.

Question 17

Which one of the following statements is TRUE?
A)The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that domestic workers are harmed by imports.
B)The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that there is no correlation between the level of real GDP and the employment level.
C)The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that increases in aggregate demand can boost output in the short term.
D)The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that increases in aggregate demand will increase the price level, but will leave real GDP unaffected in the short term.

Accepted Answer

The shape of the Keynesian short-run aggregate supply curve is based on the idea that in the short run, increases in aggregate demand can lead to an increase in output as firms increase production to meet the higher demand. This is because in the short run, firms may be able to use existing resources to increase output without needing to hire additional workers or invest in new equipment. Therefore, statement C is true. None of the other statements accurately describe the shape of the Keynesian short-run aggregate supply curve.

Question 18

Why is persistent unemployment a possibility in the Keynesian model but NOT in the classical model?
A)The Keynesian model assumes that people work for motives other than those of earning an income for themselves and supporting a family.
B)The Keynesian model assumes that nominal wages are inflexible downward.
C)The Keynesian model assumes that the level of real GDP is inflexible.
D)The Keynesian model assumes that workers can lose their jobs to foreign competition during economic downturns.

Accepted Answer

In the Keynesian model, nominal wages are assumed to be inflexible downward, meaning they cannot easily be lowered during an economic downturn. This can lead to persistent unemployment as firms are unable to reduce their wage costs and therefore must either reduce employment or reduce production. In contrast, the classical model assumes that wages and prices are flexible and will adjust to restore full employment in the long run. Therefore, persistent unemployment is not seen as a possibility in the classical model.

Question 19

Keynes argued that because of sticky prices and wages
A)the short-run aggregate supply curve could be horizontal.
B)the short-run aggregate supply curve is probably vertical.
C)the long-run aggregate supply curve slopes downward.
D)the aggregate demand curve is vertical.

Accepted Answer

Keynes argued that because of sticky prices and wages, it is possible for the short-run aggregate supply curve to be horizontal as firms may not adjust their prices and wages immediately in response to changes in aggregate demand. This means that increases in aggregate demand will result in increases in output, rather than in prices.

Question 20

The Keynesian short-run aggregate supply curve
A)is horizontal.
B)is vertical.
C)reflects the fact that real GDP is supply-determined.
D)reflects the fact that real GDP does not vary with changes in aggregate demand.

Accepted Answer

The Keynesian short-run aggregate supply curve is horizontal, indicating that in the short run, changes in aggregate demand will result in changes in the level of output, rather than changes in the price level. This is because, in the short run, prices are sticky (i.e. they do not immediately adjust to changes in demand) and firms will adjust output levels instead.

Quiz 10: Classical and Keynesian Macro Analyses

To explain the existence of excess capacity, Keynes argued that

Q: How many economists does it take to change a light bulb? A: All. Because then you will generate employment, more consumption, moving the aggregate demand curve to the right. This joke represents the view of

The Keynesian contention that the short-run aggregate supply curve is horizontal is based on the assumption that there are

Which one of the following statements is TRUE?

The short-run aggregate supply curve is a relationship between

If the economy is operating at a point at which short-run aggregate supply is horizontal, then

In the Keynesian model which includes the Keynesian short-run aggregate supply curve

Keynesian economists argue that

The approach to understanding the determination of real GDP and the price level that emphasizes incomplete adjustment in the prices of many goods is

According to Keynes

The Keynesian short-run aggregate supply curve is demonstrated graphically as a

Which of the following is a basic difference between the classical model and the Keynesian model in which the Keynesian short-run aggregate supply curve exists?

The Keynesian short-run aggregate supply curve is horizontal because

Which one of the following statements is TRUE?

The short-run aggregate supply curve is horizontal if

In the Keynesian model in which the Keynesian short-run aggregate supply curve exists

Which one of the following statements is TRUE?

Why is persistent unemployment a possibility in the Keynesian model but NOT in the classical model?

Keynes argued that because of sticky prices and wages

The Keynesian short-run aggregate supply curve