Introduction to Economic Reasoning, 8e (Rohlf)
Web Chapter: Keynes and the Classical Economists: The Early Debate on Policy Activism
1) The aggregate supply curve implied by the classical model of the economy is
A) upward sloping.
B) downward sloping.
C) vertical.
D) horizontal.
E) horizontal until full employment, then vertical.
2) Given the classical aggregate supply curve, a reduction in aggregate demand will tend to
A) lower both equilibrium GDP and the price level.
B) lower equilibrium GDP but leave the price level unchanged.
C) increase equilibrium GDP but lower the price level.
D) lower the price level but leave equilibrium GDP unchanged.
E) increase unemployment but reduce the price level.
3) According to the classical model, an increase in aggregate demand will tend to
A) increase both real GDP and the price level.
B) reduce both real GDP and the price level.
C) increase the price level but leave real GDP unchanged.
D) lower the price level but leave real GDP unchanged.
E) increase real GDP but lower the price level.
4) According to Say’s Law,
A) demand creates its own supply.
B) consumption spending depends on income.
C) saving depends on income.
D) supply creates its own demand.
E) households tend to save more at lower interest rates than at higher interest rates.
5) Which of the following is a description of Say’s Law?
A) Households may either spend their incomes or save them.
B) In the process of producing goods and services, enough income is created to purchase all the
output.
C) Saving is necessary to finance investment, and investment is the key to economic growth.
D) When goods and services are produced, all of the income created is either saved or invested.
E) The steady growth of population ensures an ever expanding economy.
6) The classical economists did not believe that saving could lead to unemployment because
A) all the money that households saved would be borrowed by businesses for investment.
B) prices would rise to make up for any reduction in total spending.
C) businesses would cut back their output whenever saving increased, thus ensuring that all of
their output was sold.
D) government would not permit excessive saving.
E) foreigners would compensate for any slowdown in domestic spending.
7) According to the classical economists, the amount that businesses plan to invest will always
be equal to the amount that households desire to save because
A) incomes will adjust to make them equal.
B) prices will adjust to make them equal.
C) the interest rate will adjust to make them equal.
D) wage rates will adjust to make them equal.
E) exchange rates will adjust to make them equal.
8) In the classical model, an increase in saving by households would
A) result in unemployment.
B) lower the interest rate and stimulate investment.
C) cause the interest rate to rise, leading to higher prices and greater profits for businesses.
D) mean a higher level of consumption spending.
E) lower spending by foreigners.
9) The classical economists believed that unemployment could not persist because
A) the government would step in and stimulate the economy by increasing government spending.
B) rising prices would make up for any deficiency in spending and make it profitable to rehire
workers.
C) falling wages would cause businesses to expand employment.
D) unemployment benefits would eventually run out, and voluntarily unemployed workers would
return to their jobs.
E) workers would move abroad, reducing the unemployment ranks.
10) According to the classical economists, if there was too little spending for goods and services
A) businesses would increase their prices to make up for the lost sales.
B) a surplus of goods and services would result, and prices would tend to fall.
C) a shortage of goods and services would result, and prices would tend to rise.
D) businesses would increase their output to make up for the deficiency.
E) prices and wages would remain stable, and spending by foreigners would expand to take up
the slack.
11) Which of the following statements about the views of the classical economists is false?
A) They believed that any involuntary unemployment had to be a short-term phenomenon.
B) They believed that lower interest rates would encourage investment spending.
C) They believed that higher interest rates would encourage saving.
D) They believed that the appearance of labor surpluses would cause wages to fall.
E) They supported an expanded role for government in combating unemployment when it arose.
12) The classical economists believed that if unemployment persisted for a long period of time
A) total spending must be deficient.
B) it must be voluntary.
C) government spending should be increased.
D) wages and prices would eventually begin to rise.
E) total spending must be excessive.
13) Keynes’s 1936 book was entitled
A) The Wealth of Nations.
B) Capitalism and Freedom.
C) The General Theory.
D) The Classical Economists.
E) A New View of Society.
14) According to Keynes, the primary cause of unemployment is
A) highly flexible wages and prices.
B) excessive government intervention.
C) too little spending.
D) excessive profit making by businesses.
E) lazy workers.
15) According to Keynesian theory, an increase in the level of saving
A) would cause wages and prices to fall.
B) could lead to unemployment, because the interest rate tends to ensure that the amount saved
by households is borrowed and invested.
C) would tend to lower the interest rate and cause businesses to borrow more money.
D) could lead to a deficiency of total spending and cause unemployment.
E) would cause prices to rise.
16) Keynes believed that the level of investment spending is primarily determined by
A) the interest rate.
B) profit expectations.
C) the level of income.
D) the price level.
E) the rate of taxation on personal income.
17) According to Keynes, prices and wages
A) never adjust upward or downward.
B) will automatically adjust to ensure full employment.
C) tend to be rigid or sticky.
D) tend to rise during periods of unemployment.
E) should be regulated by government.
18) The equilibrium output is the output
A) that will tend to be maintained.
B) at which full employment prevails.
C) at which total output equals total income.
D) at which government tax revenues are maximized.
E) at which government spending exactly equals government tax revenues.
19) In the Keynesian model of a private economy, the equilibrium output exists when
A) total income equals total output.
B) saving is equal to consumption.
C) total spending is equal to total output.
D) consumption plus investment equals total spending.
E) the government’s budget is balanced.
20) Which of the following is true?
A) Saving is described as an injection and investment is described as a leakage.
B) In the Keynesian model, leakages must always equal injections.
C) When leakages equal injections, full employment exists.
D) When leakages equal injections, the economy is in equilibrium.
E) In the classical model, leakages never equal injections.
21) An important conclusion of the Keynesian theory is that
A) the economy automatically tends toward equilibrium at the full employment output.
B) the economy does not tend toward an equilibrium output.
C) the economy can be in equilibrium at less than full employment.
D) government intervention always intensifies any unemployment problem that may exist.
E) the government’s budget will always tend to be balanced.
22) Keynes believed that if unemployment existed,
A) it could not persist for very long.
B) it would be automatically eliminated.
C) it could be reduced by increasing the level of government spending.
D) taxes should be increased in order to reduce the amount of spending in the economy.
E) it was voluntary.
23) The aggregate supply curve implied by the Keynesian model of the economy is
A) upward sloping.
B) downward sloping.
C) vertical.
D) horizontal.
E) horizontal until full employment, then vertical.
24) Suppose the economy is operating at full employment. Given a Keynesian aggregate supply
curve, a reduction in aggregate demand will tend to
A) lower both equilibrium GDP and the price level.
B) lower equilibrium GDP but leave the price level unchanged.
C) increase equilibrium GDP but lower the price level.
D) lower the price level but leave equilibrium GDP unchanged.
E) increase unemployment but reduce the price level.
25) Suppose the economy is operating at potential GDP. Given a Keynesian aggregate supply
curve, an increase in aggregate demand will tend to
A) increase both real GDP and the price level.
B) reduce both real GDP and the price level.
C) increase the price level but leave real GDP unchanged.
D) lower the price level but leave real GDP unchanged.
E) increase real GDP but lower the price level.
26) If the aggregate supply curve has the shape implied by the Keynesian model,
A) increases in aggregate demand always lead to inflation.
B) increases in aggregate demand never cause inflation.
C) inflation will occur only if the economy attempts to operate beyond its potential.
D) increases in aggregate demand always cause both real GDP and the price level to increase.
E) increases in aggregate demand will always increase real GDP.
27) The Keynesian aggregate supply curve implies that
A) prices are highly flexible.
B) prices never change.
C) prices remain stable until full employment is reached.
D) prices are only flexible downward.
E) unemployment cannot occur.
28) Fiscal policy involves
A) altering the money supply to influence the level of economic activity.
B) manipulating the levels of government spending and taxation.
C) avoiding government intervention in the economy.
D) government policies to make wages and prices more flexible.
E) policies to intensify competition among businesses.
29) According to Keynes, the appropriate fiscal policy for a period of unemployment would
involve
A) expanding the money supply.
B) contracting the money supply.
C) government nonintervention.
D) increasing taxes.
E) increasing government spending.
30) Which of the following policies would Keynes support during a period of inflation?
A) government nonintervention
B) increasing government spending
C) reducing taxes
D) increasing taxes and/or lowering government spending.
E) policies to strengthen labor unions
31) According to Keynes, the appropriate monetary policy for a period of unemployment would
involve
A) reducing the money supply.
B) increasing interest rates.
C) lowering taxes.
D) increasing the money supply.
E) increasing government spending.
1) Keynesians are considered ________ economists, whereas the classical economists are
considered ________ economists.
A) nonactivists; activist.
B) laissez-faire; activist.
C) activist; nonactivist.
D) nonactivist; laissez-faire
2) According to the classical economists
A) unemployment is caused by too little spending.
B) the interest rate will ensure that the amount households plan to save will equal the amount
businesses desire to invest.
C) increasing government spending is the most reliable method of restoring full employment.
D) the amount households plan to save is determined primarily by their income.
3) Keynes would suggest that during a period of unemployment, government should
A) do nothing.
B) reduce its spending to stimulate the economy.
C) increase its spending to stimulate the economy.
D) take legal action against unions in order to make wages more flexible.
4) The aggregate supply curve implied by the classical model is ________ so that reduction in
aggregate demand will mean a lower overall level of ________.
A) vertical; prices.
B) vertical; output.
C) horizontal; prices.
D) horizontal; output
5) In the Keynesian model, if leakages exceed injections,
A) the economy is producing the equilibrium output.
B) the level of output will tend to fall.
C) the level of output will tend to rise.
D) the economy must be at full employment.
6) According to the classical model, even when all saving is not invested, full employment will
be maintained because
A) the government will step in and stimulate spending.
B) the equilibrium wage rate will rise to stimulate spending.
C) wages and prices will fall to permit businesses to continue hiring everyone who wants to
work.
D) the government will establish special work programs.
7) According to Keynes, the amount that households desire to save is determined primarily by
A) the rate of interest.
B) the investment plans of businesses.
C) the incomes of the households.
D) None of the above.
8) In the Keynesian model the economy is producing the equilibrium output when
A) total spending equals total output.
B) total income equals total output.
C) total saving exceeds total investment.
D) surplus inventories are maximized.
9) Perhaps the most important implication of Keynesian economics is that
A) the economy automatically tends toward full employment.
B) government should not interfere in the operation of the economy.
C) the economy always tends toward the equilibrium output.
D) the economy can come to rest at an unemployment equilibrium.
10) According to the classical economists, prolonged unemployment could be caused only by
A) too little spending.
B) workers making unreasonable wage demands.
C) external shocks.
D) changes in consumer preferences.
11) In the Keynesian model of a private economy, the equilibrium output exists when
A) total spending equals total demand.
B) consumption plus investment equals total spending.
C) the amount that households want to save equals the amount which businesses want to invest.
D) All of the above.
12) Which of the following is an example of the fiscal policy Keynes would find appropriate for
a period of unemployment?
A) decrease government spending
B) increase the money supply
C) reduce personal income taxes
D) reduce the money supply
1) According to Say’s law, “demand creates its own supply.”
2) The classical aggregate supply curve is represented as a vertical straight line.
3) According to the classical economists, a reduction in aggregate demand will result in a lower
equilibrium price level but no change in the level of equilibrium GDP.
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4) The shape of the classical aggregate supply curve stems from the classical belief that the
wages and prices are rigid, at least in a downward direction.
5) The term “hoarding” refers to hiding money rather than spending it.
6) According to the classical model, if households increased their saving, the interest rate on
loanable funds would tend to rise.
7) Keynes and the classical economists agreed that any money that was saved would be
borrowed and invested.
8) According to the classical model, if households decided to save more, the increase in the
supply of loanable funds would drive down the interest rate and stimulate investment spending.
9) The classical economists believed that an increase in aggregate demand would have no impact
on the level of equilibrium GDP.
10) In the classical model an increase in aggregate demand will tend to push up the price level
and the equilibrium level of real GDP.
11) The classical economists advocated increased government spending to help combat
unemployment.
12) According to the classical economists, if households chose to hoard a portion of their income
rather than spend it, prices and wages would tend to fall so that all output would be sold and full
employment would be maintained.
13) Keynes’s book, The General Theory of Employment Interest and Money, was written in 1920.
14) According to Keynes, the classical economists were correct in their belief that the economy
automatically tends toward full employment.
15) According to Keynes, the amount that households save is a function of (or determined by)
their level of disposable income, not the interest rate as the classical economists had
hypothesized.
16) Keynes and the classical economists agreed that the economy would always tend toward
equilibrium.
17) In a simple economy with only two sectors (households and businesses), the economy is in
equilibrium whenever the amount that households desire to save is equal to the amount that
businesses desire to invest.
18) The Keynesian aggregate supply curve becomes vertical at the economy’s full-employment
output.
19) According to the Keynesian model, if the economy is initially operating at full employment,
a reduction in aggregate demand will lead to a lower price level.
20) When the aggregate supply curve has the shape implied by the simple Keynesian model,
increases in aggregate demand will always lead to a higher price level.
21) Keynes was confident that increases in the level of saving would lead to lower interest rates
which insure that the higher savings were borrowed and invested.
22) According to Keynes, the proper fiscal policy for a period of unemployment would be to
increase taxes or reduce government spending.
23) If inflation exists, Keynes would argue for a reduction in government spending or an increase
in taxes.
24) According to the Keynesian model, if unemployment exists increasing the money supply
may help to stimulate spending and alleviate the problem.
25) Both Keynes and the classical economists believed that government intervention was
necessary to maintain full employment.
26) According to Keynes, unemployment is caused by too little spending.
27) Keynes believed that wages and prices tended to be highly flexible, particularly in a
downward direction.
28) If the economy is initially operating at full employment, a reduction in aggregate demand
will lead to lower prices in the classical model but not in the Keynesian model.
29) If the economy is initially operating at full employment, an increase in aggregate demand
will lead to higher prices in both the Keynesian and classical models.
30) Increased saving can lead to unemployment in the Keynesian model but not in the classical
model.
1) Suppose that the economy is operating at full employment when households become
pessimistic about the future and cut back their spending. What would Keynes expect to happen to
the equilibrium level of GDP and the price level? Would the classical economists agree? Defend
your conclusions.
2) Why were the classical economists convinced that full employment would be maintained even
in the face of hoarding? Why did Keynes disagree?
Question Status: Previous Edition
3) The shape of the aggregate supply curve depends on the assumptions that are made about the
behavior of wages and prices. Explain in detail.
4) Suppose that the economy is experiencing unemployment. What remedies would Keynes
propose and how would they help to return the economy to full employment?
5) Explain the meaning of “equilibrium output” and use the circular flow diagram to explain why
the aggregate economy is in equilibrium when saving is equal to investment.