Question 1

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 decade of the 1930s, including the Great Depression, is consistent with the Keynesian model. This is because the economy experienced high levels of unemployment and significant declines in output, which are characteristic of a demand-driven recession. The classical model and the idea that increases in aggregate demand will increase the price level but leave real GDP unchanged do not account for these economic developments. Additionally, a vertical short-run aggregate supply curve is inconsistent with the observed behavior of prices and real GDP during the period.

Question 2

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 3

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 4

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

When short-run aggregate supply is horizontal, it means that the economy is operating at full capacity and any increase in aggregate demand will lead to an increase in real GDP without any increase in the price level. Therefore, increases in aggregate demand do not increase the price level, making option C the correct answer. Options A and B are incorrect because real GDP can still expand or contract within the limits of the horizontal SRAS curve. Option D is also incorrect since an increase in aggregate demand will increase real GDP without causing inflation.

Question 5

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, an increase in aggregate demand would cause real GDP to rise without changing the price level in the short run due to the existence of idle resources and sticky nominal wages. This is depicted by the Keynesian short-run aggregate supply curve, which is horizontal until full employment is reached. Therefore, option B is the correct answer.

Question 6

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 that there are sticky prices. This means that prices for goods and services do not adjust quickly to changes in demand or supply, and hence, changes in demand or supply mostly affect the quantity supplied rather than the price. This assumption helps to explain why changes in aggregate demand can have a significant impact on output and employment in the short run, whereas in the long run, prices and wages adjust, and the economy returns to its potential output level.

Question 7

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 approach that emphasizes incomplete adjustment in the prices of many goods is the Keynesian model. Keynesian economics suggest that in the short run, wages and prices are relatively inflexible, leading to a situation where markets do not clear and there can be a persistent level of unemployment. This model focuses on the role of aggregate demand and the potential need for government intervention to stabilize the economy.

Question 8

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 shows the relationship between the overall price level in the economy and the quantity of goods and services that firms are willing to supply. It is based on the assumption that input prices (such as wages and raw materials) are sticky in the short-run and do not adjust rapidly to changes in the overall price level. Therefore, changes in the price level will affect the profitability of firms and their willingness to produce output in the short run. The curve slopes upward because initially, a higher price level leads to higher profits for firms and incentivizes them to increase production.

Question 9

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 10

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 Keynesian short-run aggregate supply curve is upward-sloping because Keynesians believe that increases in aggregate demand can boost output in the short term. This is due to the belief that there may be idle resources or unemployed workers in the economy that can be put to use with increased demand. As a result, businesses increase production in the short run to meet the higher demand, leading to higher output.

Question 11

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 12

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 view of Keynesian economists who believe that government intervention can help increase aggregate demand and stimulate economic growth. The joke suggests that changing a light bulb can have a ripple effect on the economy by creating employment and increasing consumption.

Question 13

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 sticky prices and wages can cause short-run aggregate supply curve to be horizontal instead of vertical. This means that in the short run, changes in aggregate demand can lead to changes in output rather than just changes in prices.

Question 14

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 15

The simplified Keynesian model
A) holds the price level constant.
B) holds real GDP constant.
C) assumes investment and saving are always equal.
D) assumes unemployment is unrelated to real GDP.

Accepted Answer

The simplified Keynesian model holds the price level constant, which means that it does not consider the effects of changes in prices on the economy.

Question 16

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 markets will always clear, meaning that any excess supply or demand will be quickly eliminated through adjustments in prices and wages. Therefore, it cannot explain periods of prolonged unemployment because, according to the classical model, unemployment is always voluntary and caused by workers choosing not to work at prevailing wage rates.

Question 17

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 18

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

Accepted Answer

The Keynesian short-run aggregate supply curve is horizontal, indicating that prices do not change as demand increases or decreases in the short run. This reflects the idea that there can be excess capacity or unemployment in the economy, so output can increase without a rise in prices.

Question 19

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

Accepted Answer

Keynes believed that nominal wages are sticky in the short-run, meaning they do not adjust immediately to changes in the overall price level. This leads to a positively sloped short-run aggregate supply curve, as firms have an incentive to increase output in response to higher prices, while costs initially remain fixed. Money illusion, the tendency for individuals to misperceive changes in nominal income or prices as changes in real income or prices, is also a concept recognized by Keynes. However, he did not believe that markets were perfectly competitive, and instead argued for the importance of imperfect competition and government intervention to address market failures.

Question 20

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, which means that workers may not voluntarily reduce their wages in response to a surplus of labor. As a result, wages may remain high, causing persistent unemployment even as the economy is operating below its potential level of output. In contrast, the classical model assumes that wages and prices are flexible, which means that market forces will eventually eliminate any unemployment that arises due to a mismatch between labor supply and demand.

Quiz 11: Classical and Keynesian Macro Analyses

Which one of the following statements is TRUE?

The Keynesian short-run aggregate supply curve is horizontal because

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

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

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

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

The short-run aggregate supply curve is a relationship between

The short-run aggregate supply curve is horizontal if

Which one of the following statements is TRUE?

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

Keynes argued that because of sticky prices and wages

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

The simplified Keynesian model

Which one of the following statements is TRUE?

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

According to Keynes

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