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Chapter 11 Classical and Keynesian Macro Analyses 379
21) Keynes suggested that the short run aggregate supply (SRAS) curve
A) is vertical. B) is horizontal.
C) slopes downward. D) is not a relevant concept.
22) Keynesian economics predicts that if government policy makers deem current equilibrium real
Gross Domestic Product (GDP) to be too low, then an appropriate policy action would be to
A) do nothing, because the economy is self adjusting.
B) raise government spending, thereby increasing aggregate demand and pushing up real
Gross Domestic Product (GDP) with little or no inflationary consequences.
C) increase taxes, thereby causing aggregate demand to increase and inducing a rise in real
Gross Domestic Product (GDP) with little or no inflationary consequences.
D) reduce the money stock, thereby causing aggregate demand to decrease and inducing a
rise in fall in the price level that generates an increase in total planned expenditures.
23) The short run aggregate supply (SRAS) curve represents the relationship between
A) the price level and the real Gross Domestic Product (GDP) without full adjustment or full
information.
B) the price level and the real Gross Domestic Product (GDP) without full adjustment but
with full information.
C) the price level and the nominal Gross Domestic Product (GDP).
D) the decisions of producers and the decisions of consumers.
24) In the short run, an increase in the price level induces firms to expand production because
A) prices of inputs are held constant, so the higher prices for firms products imply that it is
profitable to expand production.
B) each firm must keep its production level up to the level of its rivals, and some firms will
expand production as the price level increases.
C) higher prices allow firms to hire more inputs by offering higher prices for inputs, which
increases productivity and profits.
D) they can increase profits by increasing maintenance costs.
25) The relationship between the price level and the real Gross Domestic Product (GDP) without
full adjustment or full information is represented by
A) the long run aggregate supply curve.
B) the short run aggregate supply curve.
C) the aggregate demand curve.
D) the distance between the long run aggregate supply curve and the short run aggregate
supply curve.
26) According to Keynes, the classical model could not explain
A) a recession or depression. B) periods of rising unemployment.
C) a long term economic decline. D) periods of rising interest rates.
27) In the simple Keynesian portion of the upward sloping short run aggregate supply curve,
A) equilibrium real GDP is demand determined.
B) equilibrium real GDP is supply determined.
C) equilibrium real GDP is neither determined by aggregate supply nor by aggregate
demand.
D) equilibrium real GDP is determined by both aggregate supply and aggregate demand.
28) The short run aggregate supply curve is horizontal when
A) prices are inflexible and the economy is at full employment.
B) there are unemployed resources and prices do not increase when aggregate demand
increases.
C) there are unemployed resources and prices do not decrease when aggregate supply
increases.
D) there are no unemployed resources and prices do not increase when aggregate demand or
supply increases.
29) Refer to the above figure. The classical aggregate supply curve is represented by ________ and
the Keynesian short run aggregate supply curve is represented by ________.
A) curve 2; curve 1 B) curve 2; curve 3
C) curve 3; curve 4 D) curve 2; curve 4
30) Real GDP is ________ determined in the classical model and ________ determined in the
Keynesian model.
A) supply; supply B) supply; demand
C) demand; supply D) demand; demand
31) In the Keynesian model, to understand the determination of income and employment it is
necessary to understand
A) how aggregate supply is determined.
B) how aggregate demand is determined.
C) how long run aggregate supply is determined.
D) how interest rates are determined.
32) According to Keynes, wages are inflexible because
A) of the minimum wage set by government.
B) of unions and long term contracts.
C) workers do not behave in their own self interest.
D) the economy is never in the long run.
33) Which of the following is a true statement?
A) A decrease in aggregate demand was not possible according to the classical economists but
was possible according to Keynes.
B) A decrease in aggregate demand has no short run effects according to the classical
economists but had significant effects according to Keynes.
C) Classical economists believed real GDP adjusted more than prices when aggregate
demand fell, while Keynes argued that prices adjusted more than output.
D) Classical economists believed price adjusted more than output when aggregate demand
fell, while Keynes argued real GDP adjusted more than prices.
34) 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.
35) 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
36) 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.
37) 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.
38) Which of the 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.
39) 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.
40) 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.
41) 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.
42) 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.
43) 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.
44) 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.
45) 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.
46) 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.
47) 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.
48) 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.
49) 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.
50) 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.
51) 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.
52) 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.
53) 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.
54) 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.
55) Keynesian economists argue that
A) prices and wages are flexible.
B) prices and wages must be set by government.
C) prices and wages are subject to downward stickiness.
D) prices and wages depend on the decisions by the Federal Reserve Bank.
56) Keynesian economists argue that
A) the natural rate of unemployment is below the actual rate.
B) unemployment is a long lasting phenomenon in the economy.
C) unemployment only exists during periods of war in the economy.
D) the natural rate of unemployment is zero.
57)
J
ohn Maynard Keynes developed his economic theories in the
A) 1870s. B) 1900s. C) 1930s. D) 1960s.
58) Refer to the above figure. Which of the graphs is consistent with the Keynesian short run
aggregate supply curve?
A) Graph A B) Graph B C) Graph C D) Graph D
59) Refer to the above figure. Which of the graphs is consistent with the long run aggregate supply
curve?
A) Graph A B) Graph B C) Graph C D) Graph D
60) Which of the following will NOT shift the Keynesian short run aggregate supply curve?
A) a change in technology B) a change in profit expectations
C) a change in input prices D) a change in the price level
61) Which of the following will shift the Keynesian short run aggregate supply curve downward
and to the right?
A) a rise in the price level B) a fall in the price level
C) a decrease in input costs D) an increase in input costs
62) The horizontal short run aggregate supply curve
A) assumes that wages and all other input prices are constant.
B) shows that real GDP can be increased only when prices increase.
C) assumes that there is full employment in the economy.
D) assumes that opportunity cost is constant.
63) According to Keynes, the stickiness of wage rates could best be explained by
A) minimum wage laws. B) unions and long term labor contracts.
C) short term labor contracts. D) government interference.
64) According to Keynesian economics, if there are unutilized resources in the economy and
aggregate demand increases,
A) real GDP will rise and price level will remain constant.
B) real GDP will fall and price level will remain constant.
C) real GDP will rise and price level will rise.
D) real GDP will rise and price level will fall.
65) According to Keynesian economics, if there are unutilized resources in the economy and
aggregate demand decreases,
A) real GDP will rise and price level will remain constant.
B) real GDP will fall and price level will remain constant.
C) real GDP will rise and price level will rise.
D) real GDP will rise and price level will fall.
66) Keynesian economists would likely argue that the classical model is which of the following?
A) a long run theory B) a short run theory
C)
b
oth a long run and short run theory D) a sticky price theory
67) Some economists believe that a positive aggregate demand shock to an economy with large
amounts of excess capacity and unemployment does not necessarily cause an increase in prices.
Economists who adhere to this belief are followers of
A) classical economics. B) Say s laws of economics.
C) Keynesian economics. D) supply side economics.
68) Using a graph, analyze the Great Depression from a Keynesian perspective. What happened to
unemployment?
69) What is the major difference between the classical model and the Keynesian model? Explain.
70) For several years, the U.S. unemployment rate has been below the European unemployment
rate. Offer a Keynesian explanation for this.
71) What shape did the short run aggregate supply curve have during the 1930s, according to
Keynes? Explain.
72) According to Keynes, the economy is essentially a self regulating system. Do you agree or
disagree? Why?
11.3 Output Determination Using Aggregate Demand and Aggregate Supply: Fixed
versus Changing Price Levels in the Short Run
1) What is the underlying assumption of the original, simplified Keynesian model?
A) The relevant range of the short run aggregate supply curve (SRAS) is vertical.
B) The relevant range of the aggregate supply curve (AS) is vertical.
C) The relevant range of the short run aggregate supply curve (SRAS) is horizontal.
D) The relevant range of the long run aggregate supply curve (LRAS) is horizontal.
2) How does the original, simplified Keynesian model compare with modern Keynesian analysis?
A) The original Keynesian model assumed price flexibility whereas the modern analysis does
not.
B) In both cases, the short run aggregate supply curve (SRAS) is horizontal.
C) Modern analysis shows an upward sloping SRAS to reflect some price flexibility. The
original Keynesian model s SRAS is horizontal and assumes sticky prices.
D) All of the above.
3) The Keynesian short run aggregate supply curve in the simplified Keynesian model is
unrealistic because
A) a vertical curve does not make economic sense.
B) prices and wages will never decrease.
C) the classical model is better in explaining how the economy operates.
D) some price adjustments do take place in the short run.
4) The horizontal portion of the short run aggregate supply curve in which there is excessive
unemployment and unused capacity in the economy is
A) Say s law.
B) the classical short run aggregate supply curve.
C) the Keynesian short run aggregate supply curve.
D) exists when prices are flexible.
5) The short run aggregate supply curve in modern Keynesian analysis is
A) horizontal. B) vertical.
C) upward sloping. D) downward sloping.
6) The short run aggregate supply curve is positively sloped because
A) real interest rates rather than nominal rates are used.
B) some price adjustments take place in the short run.
C) no price adjustments take place in the short run.
D) complete price adjustments take place in the short run.
7) The short run aggregate supply curve in modern Keynesian analysis represents the relationship
between
A) the real output of goods and services in the economy and the price level.
B) the real output of goods and services in the economy and the price level when people have
fully adjusted their behavior.
C) the real output of goods and services in the economy and the price level when people have
not fully adjusted their behavior.
D) the nominal output of goods and services and the real output of goods and services.
8) Along a short run aggregate supply curve, which of the following is (are) held constant?
A) real GDP B) aggregate demand
C) input prices. D) profits
9) The full employment rate of output can
A)
b
e surpassed in the long run only if input prices are flexible.
B) not be surpassed in either the short run or the long run.
C)
b
e surpassed only when firms are not yet producing at full capacity.
D)
b
e surpassed only in the short run.
10) In the short run, real GDP can increase beyond a level consistent with the long run growth path
if
A) existing capital and labor are used more intensely.
B) the price level decreases accordingly.
C) we measure in nominal terms instead of real terms.
D) there is an increase in marginal tax rates.
11) Which of the following is NOT a reason why real GDP can be expanded beyond a level
consistent with its long run growth path in modern Keynesian analysis?
A) In the short run, existing workers can work more hours.
B) Prices and wages are flexible, allowing for needed adjustments.
C) The existing capital stock can be used more intensively.
D) Higher prices induce firms to hire more workers.
12) If short run aggregate supply is upward sloping, the assumption is that
A) prices are perfectly sticky. B) prices are set by government mandate.
C) prices are constant. D) prices adjust gradually.
13) An upward sloping short run aggregate supply curve suggests that
A) real GDP is determined by aggregate supply.
B) prices and wages are completely inflexible.
C) prices and wages are completely flexible.
D) prices and wages adjust in part to short run demand changes.
14) In the modern Keynesian model, over much of its range the short run aggregate supply (SRAS)
curve is
A) horizontal. B) vertical.
C) upward sloping. D) downward sloping.
15) The short run aggregate supply curve in modern Keynesian analysis
A) is a horizontal line the same as in the Keynesian model.
B) is a vertical line the same as in the classical model.
C) is an upward sloping curve.
D) is a negatively sloped curve.
16) There is a distinction between the long run aggregate supply (LRAS) curve and the short run
aggregate supply (SRAS) curve. In the long run,
A) technology is fixed, but not in the short run.
B) the price level is constant in the long run, but fluctuates in the short run.
C) the aggregate supply curve is horizontal, while in the short run it is upward sloping.
D) all adjustments to changes in the price level have been made, but in the short run all
changes in the price level do not occur.
17) If the price level kept increasing, the short run aggregate supply (SRAS) curve would get
steeper because
A) all the unemployed would eventually be hired.
B) there are limits to how long workers can work long hours and capital can go without
proper maintenance.
C) the rate at which capacity can be expanded increases indefinitely.
D) the long run aggregate supply curve is horizontal.
18) In the short run, if the price level rises, then the overall economy can temporarily produce
beyond its nominal capacity. One reason for this is that
A) workers can be switched from counted to uncounted production.
B) existing capital equipment can be used more intensively.
C) wage rates rise almost simultaneously with the price level.
D) the unemployment rate usually rises dramatically along with the price level.
19) The long run aggregate supply curve is vertical at $10 trillion, but the short run aggregate
supply curve intersects the aggregate demand curve at $12 trillion. From this, we know that
A) the economy is operating below full capacity in the short run, and will have to adjust by
hiring more workers, thus reducing unemployment.
B) the price level is too high. The only way long run equilibrium can be restored is to lower
the price level.
C) adjustments will have to occur so that the long run aggregate supply equals $12 trillion.
D) adjustments will have to occur so that the short run aggregate supply intersects the
aggregate demand curve at $10 trillion.
20) Identify the 3 curves in the above figure.
A) (1) is long run aggregate supply, (2) is short run aggregate supply, (3) is aggregate
demand.
B) (1) is aggregate demand, (2) is short run aggregate supply, (3) is long run aggregate
supply.
C) (1) is short run aggregate supply, (2) is long run aggregate supply, (3) is aggregate
demand.
D) (1) is long run aggregate supply, (2) is aggregate demand, (3) is short run aggregate
supply.
21) Which point or points on the above figure illustrate a short run equilibrium?
A) Point A B) Point B
C) Point C D) Points A and C
