Economics Special Topic 4—Great Debates in Economics: Keynes Versus Hayek
MULTIPLE CHOICE
1. The General Theory of John Maynard Keynes exerted a major impact on macroeconomics during the
20th century primarily because
a.
it provided the only logically consistent view of what caused the Great Depression.
b.
it provided a reasonable explanation of what went wrong during the Great Depression and
what could be done to prevent it from happening again.
c.
it explained how gross domestic product could be measured and why this was important.
d.
it derived the conditions necessary for maximum efficiency of resource use and explained
how these conditions could be achieved through central planning.
2. In his book The Road to Serfdom, Friedrich Hayek argued that the growth of government
a.
was essential if the ups and downs of the business cycle were going to be controlled.
b.
must be increased if western democracies were going to survive.
c.
could only be achieved if monetary policy-makers were willing to expand the supply of
money more rapidly.
d.
endangered freedom and moved Western democracies toward tyranny, just as it had done
in Nazi Germany and the Soviet Union.
3. John Maynard Keynes and Friedrich Hayek
a.
had similar views with regard to the cause of the Great Depression and what might be
done to prevent it from happening again.
b.
both believed that perverse monetary policy was the primary cause of the ups and downs
of the business cycle.
c.
both believed that budget deficits and surpluses could be used to smooth the ups and
downs of the business cycle.
d.
had polar opposite views with regard to the underlying causes of economic booms and
bust, but nonetheless their scholarly work commanded widespread respect among
economists.
4. According to the Keynesian view, capitalism
a.
is a highly productive form of economic organization that works best when government
intervention is least.
b.
experiences booms and busts because of the instability of private investment that is driven
by fickle changes in business optimism.
c.
experiences booms and busts that are primarily the result of inappropriate monetary
policy.
d.
experiences fluctuations in aggregate demand that cannot be controlled with fiscal policy.
5. According to Friedrich Hayek and his followers, the booms and busts of the business cycle are
primarily the result of
a.
fluctuations in aggregate demand.
b.
the “animal spirits” of private investors.
c.
excessive credit expansion and artificially low interest rates that trigger malinvestment.
d.
the unwillingness of political decision-makers to follow the advice of macroeconomists
who know how to alter fiscal policy in a manner that would virtually eliminate the ups and
downs of the business cycle.
6. In the main chorus of the Keynes-Hayek rap lyrics, Keynes states “I want to steer markets” and Hayek
replies, “I want them set free.” These statements are referring to
a.
the tendency of Keynesians to favor government intervention and central planning and the
tendency of Hayekians to favor free markets.
b.
the tendency of Keynesians to favor restrictive fiscal policy and the tendency of Hayekians
to favor expansionary fiscal policy.
c.
the tendency of Keynesians to favor budget deficits and the tendency of Hayekians to
insist on budget surpluses.
d.
the tendency of Keynesians to favor fiscal policy and of Heyekians to favor monetary
policy.
7. Adam Smith stated, “The man of system is apt to be very wise in his own conceit. He seems to imagine
that he can arrange the different members of a great society with as much ease as the hand arranges
the different pieces upon a chess-board.” Which is true of this statement?
a.
Keynes would tend to agree with the statement; Heyek would disagree with it.
b.
Keynes would tend to disagree with the statement; Hayek would agree with it.
c.
As the rap video indicates, both Keynes and Hayek strongly agree with this statement.
d.
As the rap video indicates, both Keynes and Hayek strongly disagree with this statement.
8. What did Keynes and Hayek believe about government central planning?
a.
Both believed that central planning could be used to allocate resources efficiently.
b.
Both believed that perverse political incentives would undermine the ability of central
planners to allocate resources efficiently.
c.
Keynes believed that government central planning could improve on market outcomes;
Hayek disagreed, arguing that both political incentives and insufficient information would
undermine their ability to do so.
d.
Keynes believe that central planning would fail because the policy-makers did not have
sufficient information to plan efficiently; Hayek believed that efficient central planning
was possible if political decisions were made democratically.
