Economics Today, 19e (Miller)
Chapter 11 Classical and Keynesian Macro Analyses
11.1 The Classical Model
1) Whom among the following was a classical economist?
A) Adam Smith
B) A. C. Pigou
C) David Ricardo
D) all of the above
2) All of the following were classical economists EXCEPT
A) Adam Smith.
B) A. C. Pigou.
C) David Ricardo.
D) Milton Friedman.
3) Which of the following is NOT an assumption of the classical model?
A) Wages and prices are fixed.
B) People are motivated by the own self-interest.
C) Pure competition exists.
D) Buyers react to changes in relative prices.
4) The idea that supply creates its own demand is known as
A) the law of diminishing returns.
B) Murphy’s law
C) Keynes’ law.
D) Say’s law.
5) In the classical model, an increase in aggregate demand will cause
A) an increase in actual output, or Gross Domestic Product (GDP).
B) a decrease in actual output, or Gross Domestic Product (GDP).
C) an increase in price level.
D) a decrease in price level.
6) Classical economists assumed that
A) prices were flexible.
B) individuals did not suffer from money illusion.
C) wages were flexible.
D) all of the above
7) Which of the following is NOT a major assumption of the classical model?
A) People are motivated by self-interest.
B) People can be fooled by money illusion.
C) Prices are flexible.
D) Wages are flexible.
8) The first systematic attempt to explain the determinants of the price level and national levels
of income, employment, consumption and real Gross Domestic Product (GDP) was made by
________ economists.
A) Keynesian
B) supply-side
C) monetarist
D) classical
9) Classical economists wrote from the 1770s to the ________.
A) 1850s
B) 1890s
C) 1930s
D) 1960s
10) “Supply creates its own demand” is known as
A) Smith’s law.
B) Say’s law.
C) the circular flow.
D) the Ricardian dilemma.
11) Say’s law says that
A) consumption is greater than supply.
B) desired expenditures always equal actual expenditures.
C) people produce the goods they consume.
D) people consume the goods they produce.
12) Say’s law argues that
I. overproduction is typical in a market economy.
II. supply creates its own demand.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
13) Say’s law states that
A) supply creates its own demand.
B) supply and demand are never equal.
C) demand may be greater than supply.
D) supply will usually be greater than demand.
14) The classical model uses the assumption that
A) all wages and prices are flexible.
B) monopoly is widespread in the economy.
C) interest rates are not flexible.
D) economic markets are fragile and have no tendency to move towards an equilibrium.
15) According to the classical model, the income generated by production is
A) enough to meet the needs of everyone in society.
B) enough to purchase all the goods and services produced.
C) fully spent on savings.
D) always insufficient to purchase all the goods and services produced.
16) The implication of Say’s law is that
A) Gross Domestic Product is the same whether we use the expenditure approach or the income
approach.
B) a barter economy is the most efficient economy.
C) increased consumption today leads to increased production tomorrow.
D) overproduction in a market economy is not possible.
17) All the following are assumptions of the classical model EXCEPT
A) pure competition exists.
B) buyers and sellers react to nominal money prices rather than to relative prices.
C) people are motivated by self-interest.
D) wages and prices are flexible.
18) Say’s law explains
A) how long-term real Gross Domestic Product (GDP) stability is achieved in the classical
model.
B) how long-run real Gross Domestic Product (GDP) stability is achieved in the Keynesian
model.
C) how the economy can go into recession.
D) why economies experience business cycles.
19) If a consumer buys less gasoline because gas prices decreased by 10 percent, even though all
other prices have also decreased by 10 percent, then
A) the consumer is paying too close attention to changes in relative prices.
B) wages and prices are too flexible.
C) the consumer has been fooled by money illusion.
D) inflation is not a problem in the economy.
20) Which of the following is an example of money illusion?
A) An individual is willing to work more hours when the nominal wage rises by 10 percent and
the overall price level rises by 5 percent.
B) An individual is willing to work more hours when the nominal wage rises by 10 percent and
the overall price level rises by 20 percent.
C) An individual will neither increase nor decrease the number of hours she is willing to work
when the nominal wage rises by 10 percent and the overall price level rises by 10 percent.
D) none of the above
21) According to the circular flow of income and output, saving causes
A) total output to fall.
B) consumption expenditures and total output to fall.
C) consumption expenditures to fall short of total output.
D) investment spending to fall.
22) One key assumption of the classical model is
A) government spending plays a major role.
B) money illusion cannot fool workers.
C) wages are sticky.
D) prices are sticky.
23) Classical economists tend to
A) see unemployment as a persistent economic problem.
B) believe in Keynesian economics.
C) reject the equality of savings and investment.
D) support Say’s law.
24) In the classical model, an increase in the unemployment rate
A) will persist when the reduction in output is caused by a reduction in aggregate demand.
B) will result in an increase in the price level if the reduction in output is caused by a change in
aggregate demand.
C) will likely be temporary.
D) is a signal of demand-pull inflation.
25) According to classical economists
A) Say’s law is not valid.
B) unemployment will not be a serious problem in a market economy.
C) wage levels are always “sticky.”
D) demand stimulus is needed to produce full employment.
26) In the classical model, aggregate demand and aggregate supply will
A) not exist.
B) intersect at less than full employment.
C) intersect at the point of full employment.
D) not intersect.
27) An individual who is suffering from money illusion is more concerned with
A) relative prices than with nominal prices.
B) relative prices than with real prices.
C) nominal prices than with relative prices.
D) real prices than with nominal prices.
28) An individual who suffers from money illusion will
A) feel that the same percentage increase in prices and income improves his economic position.
B) concentrate on relative prices.
C) never be fooled by the impact of price changes on the purchasing power of income.
D) only be concerned about the prices of a few goods.
29) Suppose Moni thinks a 100 percent increase in her hourly wage as an incentive to work more
hours while the price level also increases by 100 percent. Moni is said to be suffering from
A) money illusion.
B) rationality.
C) irrationality.
D) the effects of competition.
30) The classical model assumes that
A) imperfect competition predominates in most markets.
B) people have money illusion.
C) wages and prices are flexible.
D) wages are flexible but prices are not.
31) All of the following are assumptions of the classical model EXCEPT
A) inflexible wages.
B) absence of money illusion.
C) pure competition.
D) self-interest of economic actors.
32) One tenet of classical economics is that
A) the role of the government should be limited, since the market will always be self-correcting.
B) the government should intervene whenever necessary to avoid any unemployment.
C) wages and prices are “sticky downward.”
D) the government should set a minimum wage slightly above the natural market equilibrium
rate.
33) Which of the following statements is correct?
I. If other factors are held constant, the level of employment in the economy determines real
Gross Domestic Product (GDP).
II. According to classical economists, only voluntary unemployment exists in the long run.
A) I only
B) II only
C) Both I and II
D) Neither I nor II
34) Which of the following statements about the classical model of the economy is FALSE?
A) Savings and investment will always be equal.
B) Wages and prices are flexible.
C) The economy will always move toward, or be at, full employment.
D) Individuals pursue the public interest, not their own self-interest.
35) If you feel you are better off because you receive a 5 percent raise even when the price level
also increases by 5 percent, then you are a victim of the
A) real income effect.
B) money income effect.
C) money illusion.
D) purchasing power effect.
36) Which of the following is NOT an assumption of the classical model?
A) Wages and prices are flexible.
B) People are motivated by self-interest.
C) Money illusion exists.
D) Pure competition exists.
37) A classical model of the economy predicts
A) full employment in the long run.
B) a negative unemployment rate whenever the economy is in equilibrium.
C) the same unemployment rates as the Keynesian model.
D) cyclical changes in the unemployment rate.
38) A key assumption in the classical model is
A) sticky wages.
B) pure competition.
C) sticky prices.
D) the government’s ability to stabilize the economy.
39) According to the classical model, more saving leads to more investment because
A) the people who save are the same people who invest.
B) the interest rate adjusts to keep investment equal to saving.
C) saving and investment are two sides of the same activity.
D) the interest rate is set by the federal government.
40) At higher rates of interest
A) households save less and businesses invest more.
B) households save less and businesses invest less.
C) households save more and businesses invest less.
D) households save more and businesses invest more.
41) The equilibrating force in the credit market in the classical model is
A) the interest rate.
B) the price level.
C) full employment.
D) fiscal policy.
42) Classical economists argued that
A) there would always be an excess of saving over investment.
B) workers had money illusion.
C) excess savings would create unemployment.
D) a flexible interest rate would make saving equal to investment.
43) According to classical economists, a decrease in the rate of interest will
A) increase unemployment.
B) increase consumer saving.
C) increase investment.
D) increase the inflation rate.
44) Individuals will increase their saving as
A) the interest rate falls.
B) business investment falls.
C) the rate of inflation increases.
D) the interest rate increases.
45) In the classical model, desired saving
A) exceeds investment.
B) is inversely related to real income.
C) is equal to desired investment.
D) is less than desired investment.
46) The classical economists argued that planned saving and planned investment will always be
equal because of changes in
A) the level of real disposable income.
B) the interest rate.
C) the price level.
D) wages.
47) According to classical theory, desired saving always equals investment due to changes in
A) prices.
B) wages.
C) the interest rate.
D) taxes.
48) In economics, investment is defined as
A) the spending by businesses on capital goods and inventories.
B) the spending by households on human capital and durable goods.
C) disposable income minus consumption.
D) disposable income plus consumption.
49) With respect to unemployment, the classical model states that
A) unemployment of any kind cannot exist.
B) only voluntary unemployment exists.
C) unemployment fluctuates with the interest rate.
D) involuntary unemployment will always exceed voluntary unemployment.
50) According to classical theory, full employment in the labor market occurs
A) whenever aggregate demand is less than aggregate supply.
B) at a wage rate at which quantity demanded equals quantity supplied.
C) only when the economy has just experienced a demand shock.
D) only when actual expenditures are greater than desired expenditures.
51) In the classical model, what occurs if a wage of $20/hour results in unemployed workers?
A) The workers will go on strike to demand that more jobs be created.
B) Producers will quickly create more jobs and hire the unemployed workers, so unemployment
is short-lived.
C) The wage rate will drop, more workers will be hired, and the unemployment rate falls.
D) The government will step in and order firms to hire more workers.
52) According to classical theory, total employment and real Gross Domestic Product (GDP) are
A) unrelated.
B) positively related.
C) inversely related.
D) negatively related.
53) In the classical model, the aggregate supply curve is
A) upward sloping.
B) downward sloping.
C) horizontal.
D) vertical.
54) In the classical model, real Gross Domestic Product (GDP) per year is
A) due to supply conditions plus the extent of government intervention in the economy.
B) determined by supply and demand conditions together.
C) supply determined.
D) demand determined.
55) Suppose an economy originally in long-run equilibrium experiences a decrease in aggregate
demand. According to the classical model
A) real Gross Domestic Product (GDP) will not change but the price level will fall.
B) real Gross Domestic Product (GDP) will fall, and then the price level will fall also.
C) the price level will not change but real Gross Domestic Product (GDP) will fall.
D) real Gross Domestic Product (GDP) will fall, wages will fall, but the prices of goods and
services will stay the same.
56) In the classical model, a shift to the right in aggregate demand would result in
A) a permanent increase in unemployment.
B) a permanent increase in real incomes.
C) an increase in the price level.
D) a permanent shift past full employment.
57) According to the classical theory, an inward shift in aggregate demand would reduce
A) real Gross Domestic Product (GDP) and the price level.
B) the price level but have no effect on real Gross Domestic Product (GDP).
C) real income but have no impact on the price Gross Domestic Product (GDP).
D) the price level but increase real Gross Domestic Product (GDP).
58) According to classical theory, a shift in aggregate demand will affect
A) the price level only.
B) real Gross Domestic Product (GDP) only.
C) the level of employment only.
D) both real Gross Domestic Product (GDP) and the level of employment.
59) According to the classical model, an increase in aggregate demand would
A) lead the economy to recession.
B) lead the economy to a deflationary cycle.
C) cause an adjustment to a higher price level.
D) raise real Gross Domestic Product (GDP) but leave the price level unchanged.
60) In the classical model, the aggregate supply curve is
A) upward sloping in the short run but vertical in the long run.
B) always vertical.
C) the same as the aggregate supply curve in the Keynesian model.
D) flat at low levels of output and then eventually slopes upward as output increases.
61) According to the classical theory, the aggregate supply curve is
A) downward sloping.
B) horizontal.
C) upward sloping.
D) vertical.
62) According to classical theory, any changes in aggregate demand will
A) lead to changes in the price level.
B) lead to changes in real Gross Domestic Product (GDP), but not in the price level.
C) lead to changes in both real Gross Domestic Product (GDP) and the price level.
D) have no affect on prices or real Gross Domestic Product (GDP).
63) According to Say’s law
A) desired expenditures are always less than actual production.
B) desired production are always more than actual production.
C) desired expenditures are always equal to actual expenditures.
D) desired expenditures cannot be compared with actual expenditures.
64) Say’s law implies that
A) consumers’ willingness to spend is unrelated to the production of goods and services.
B) producing goods and services generates the means and the willingness to purchase other
goods and services.
C) prices and wages are sticky upwards.
D) wages and prices are inflexible.
65) In a classical model
A) equilibrium real GDP is supply determined.
B) equilibrium real GDP is determined by the government.
C) equilibrium real GDP is determined by both aggregate supply and aggregate demand.
D) equilibrium real GDP is neither determined by aggregate supply nor by aggregate demand.
66) The condition of fully flexible wages and prices was assumed by
A) the classical economists.
B) the Keynesian economists.
C) modern economists.
D) no economists.
67) The approach to understanding the determination of real GDP and the price level that
emphasizes flexible wages and prices and competitive markets is
A) the classical model.
B) the Keynesian model.
C) Adam Smith’s Law.
D) Murphy’s Law.
68) The classical economists assumed that
A) monopoly was widespread in the economy.
B) government intervention in the economic system was necessary and helpful.
C) wages and prices were sticky in going downward.
D) wages and prices were flexible.
69) According to the classical economists, an economy producing $10 million in goods and
services
A) may be producing too much since the needs of people may not be this great.
B) simultaneously generates the income necessary to purchase $10 million in goods and services.
C) is supplying $10 million in goods and services, but could be demanding more or less than $10
million in goods and services for a very long period of time.
D) could experience a permanent surplus if no one has estimated the demand for goods and
services in the economy.
70) According to the classical economists, actual real GDP
A) always equals actual aggregate income.
B) sometimes equals actual aggregate income.
C) never equals actual aggregate income.
D) is not related to aggregate income.
71) “Supply creates its own demand” is known as
A) Keynes’ Rule.
B) Murphy’s law
C) Smith’s law.
D) Say’s law.
72) The concept that producing goods and services generates the means and the willingness to
purchase other goods and services is
A) the Keynesian approach.
B) money illusion.
C) Say’s law.
D) secular deflation.
73) Say’s law states that
A) desired expenditures will equal actual expenditures.
B) people produce only the goods they want.
C) demand is always less than supply.
D) overproduction is never possible because of limited resources.
74) Which of the following statements is NOT true about Say’s law?
A) Desired expenditures will equal actual expenditures.
B) Surpluses will be eliminated by falling prices and shortages will be eliminated by increasing
prices.
C) People produce more goods than they want for their own use only if they seek to trade them
for other goods.
D) Markets would be regularly hit by severe shortages and surpluses.
75) Say’s law implies that
A) surpluses never occur.
B) surpluses or shortages are possible, but only for a short time.
C) shortages is a persistent phenomenon.
D) shortages never occur.
76) Which of the following is NOT true according to Say’s law?
A) Supply creates its own demand.
B) No overproduction is possible in a market economy in the long run.
C) Desired expenditures will always be higher than actual expenditures.
D) Producing goods and services generates the means and the willingness to purchase other
goods and services.
77) An assumption of the classical model is that
A) money illusion is widespread.
B) people make decisions based on nominal prices rather than real prices.
C) prices are flexible while wages are inflexible.
D) people are motivated by self-interest.
78) Which of the following is NOT an assumption of the classical model?
A) Wages and prices are flexible.
B) Inflation will lead to money illusion.
C) People are motivated by self-interest.
D) Pure competition exists.