The Keynesian Short-run Policy Model: Demand-Side Policies
Which of the following most accurately describes why Keynes argued that it was necessary for government to actively engage in the macroeconomy when the economy moved into the contractionary phase of the business cycle: A. The economy is self-regulating and therefore government intervention is necessary. B. The economy can become trapped at an equilibrium that is below the equilibrium at potential output. C. Households are likely to increase their spending during economic contractions and government must respond. D. Prices will adjust and move the economy back to potential output.
B
According to Keynesian economists, which of the following would likely be the most effective fiscal policies if the economy was moving into a recession: A. Cut income taxes on U.S. households earning between $250,000 and $350,000 and increase government spending on research & development. B. Decrease taxes on households earning more than $1,000,000 annually and increase spending on "shovel ready" construction projects. C. Increase unemployment benefits and increase spending on "shovel ready" projects. D. Decrease payroll taxes and increase income taxes on households earning over $35,000.
C
If the economy was contracting, Keynesian economists would most likely recommend that the government: A. Engage in expansionary fiscal policy and balance the budget. B. Engage in contractionary fiscal policy and run a budget deficit if necessary. C. Engage in expansionary fiscal policy and run a budget deficit if necessary. D. Engage in contractionary fiscal policy and run a budget surplus.
C
If the U.S. economy went into a recession, which of the following policy prescriptions would Keynesian economists most likely recommend: A. Increase the length of time the unemployed are eligible for unemployment insurance payments and increase payroll taxes. B. Decrease income taxes on households with annual income of more than $200,000 and increase spending on public physical capital (infrastructure projects). C. Decease federal excise and payroll taxes, increase state excise and sales taxes. D. Increase spending on "shovel-ready" infrastructure projects and decrease payroll taxes.
D
Which of the following are pro-cyclical fiscal or monetary policies: A. The economy is in a contractionary phase and the government decreases taxes and increases spending. B. The economy is in a contractionary phase and the Fed decreases interest rates. C. The economy is in an expansionary phase and the government increases taxes and decreases spending. D. The economy is in an expansionary phase and the government decreases taxes and increases spending.
D
According to Keynesian economists a significant decrease in aggregate demand can cause: a. A recessionary gap in real GDP leading to high unemployment and a decrease in the price level. b. A recessionary gap in real GDP leading to high unemployment and an increase in the price level. c. An inflationary gap in real GDP leading to low unemployment and increase in the price level. d. An inflationary gap in real GDP leading to high unemployment and an increase in the price level.
a
Aggregate demand management policies are designed most directly to: a. Control the aggregate level of spending in the economy. b. Minimize unemployment. c. Minimize inflation. d. Prevent budget deficits or surpluses.
a
Fiscal policies are policies that directly affect: a. Government spending and taxes. b. Interest rates. c. The price level. d. The money supply.
a
If businesses expect future demand to increase, this will cause a: a. Rightward shift of the aggregate demand curve. b. Leftward shift of the aggregate demand curve. c. Movement down the aggregate demand curve. d. Movement up the aggregate demand curve.
a
If output moves below potential output, it is most likely that: a. Unemployment will increase, and inflation will decrease. b. Both unemployment and inflation will increase. c. Unemployment will be unchanged, and inflation will decrease. d. Both unemployment and inflation will decrease.
a
If potential output exceeds actual output, the economy: a. Is experiencing a recessionary gap. b. Is in neither a short-run nor long-run equilibrium. c. Is experiencing an inflationary gap. d. May be in a long-run equilibrium but is not in a short-run equilibrium.
a
Keynes argued that it was necessary for government to actively engage in the macroeconomy when the economy moved into the contractionary phase of the business cycle because: a. The economy can become trapped at an equilibrium that is below the equilibrium at potential output. b. Prices will respond and move the economy back to potential output. c. Households are likely to increase their spending during economic contractions and government has to respond. d. The economy is self-regulating and therefore government intervention is necessary.
a
Keynes believed equilibrium income was: a. Not fixed at the economy's potential income. b. Always below the economy's potential income. c. Fixed at the economy's potential income. d. Always above the economy's potential income.
a
Keynesian economists are most likely to recommend which of the following government actions during a recession: a. Expansionary fiscal policy and expansionary monetary policy. b. Contractionary fiscal policy and contractionary monetary policy. c. Expansionary fiscal policy and contractionary monetary policy. d. Expansionary monetary policy and contractionary fiscal policy.
a
Potential income is that level of income that: a. An economy is capable of producing without generating higher inflation. b. The economy always produces. c. Toward which the economy gravitates in the short-run. d. An economy is capable of producing without generating unemployment.
a
The business cycle is: a. The term used to describe fluctuations in output around its long-term trend. b. Regular and predictable. c. The length of time required by a firm to buy inputs and produce and sell output. d. The pattern of increases and decreases in the money supply.
a
Which of the following are pro-cyclical fiscal policies: a. The economy is in an expansionary phase and the government decreases taxes and increases spending. b. The economy is in an expansionary phase and the government increases taxes and decreases spending. c. The economy is in a contractionary phase and the government decreases taxes and increases spending. d. The economy is in a contractionary phase and the government increases taxes and increases spending.
a
Which of the following would most likely increase aggregate demand during an economic contraction: a. Redistribute income from high-income households to lower income households. b. Redistribute income from lower income households to high-income households. c. Encourage households to support free trade by buying products from overseas. d. Encourage households to increase their saving.
a
According to Keynesian economics, which of the following would likely be the most effective fiscal policies if the economy was moving into a recession: a. Cut income taxes on US households earning between $250,000 and $350,000 and increase government spending on research & development. b. Increase unemployment benefits and increase spending on "shovel ready" projects. c. Decrease taxes on households earning more than $1,000,000 annually and increase spending on "shovel ready" construction projects. d. Decrease social security taxes and increase income taxes on households earning over $35,000.
b
According to Keynesian economics, which of the following would likely be the most effective fiscal policies if the economy was moving into a recession: a. Decrease taxes on households earning more than $1,000,000 annually and increase spending on "shovel ready" construction projects. b. Increase unemployment benefits and increase spending on "shovel ready" projects. c. Cut income taxes on US households earning between $250,000 and $350,000 and increase government spending on research & development. d. Decrease social security taxes and increase income taxes on households earning over $35,000.
b
Before the Great Depression the popular view of government was: a. Laissez-faire, and after the Depression, the popular view of government was still laissez-faire. b. Laissez-faire, and after the Depression, the popular view of government was activist. c. Activist, and after the Depression, the popular view of government was still activist. d. Activist, and after the Depression, the popular view of government was laissez-faire.
b
If the U.S. economy was experiencing a recession, a Keynesian economist would most likely advise which of the following policy prescriptions? a. The government should reduce the average SNAP (food stamps) benefit from $1.50 per meal per person to $1.15 per meal per person. b. The government should reduce income taxes on households earning less than $100,000 per year. c. The government should reduce the amount of time the unemployed are entitled to receive unemployment benefits. d. The government should reduce corporate income taxes.
b
If the U.S. economy went into a recession, which of the following policy prescriptions would Keynesian economists most likely recommend: a. Increase the length of time the unemployed are eligible for unemployment insurance payments and increase payroll taxes. b. Increase spending on "shovel-ready" infrastructure projects and decrease payroll taxes. c. Decrease income taxes on households with annual income of more than $200,000 and increase spending on public physical capital (infrastructure projects). d. Decease federal excise and payroll taxes, increase state excise and sales taxes.
b
If the US economy was experiencing an unsustainable economic expansion (causing an increase in the price level and a decrease in the unemployment rate below the target rate) Keynesian economists would advise the government to: a. Increase income taxes and increase spending. b. Increase income taxes and reduce spending. c. Reduce income taxes and increase spending. d. Leave taxes and spending alone and wait for the self-adjusting mechanism of the market to bring the economy back to potential GDP.
b
If the economy was contracting, Keynesian economists would most likely recommend that the government: a. Engage in contractionary fiscal policy and run a budget surplus. b. Engage in expansionary fiscal policy and run a budget deficit if necessary. c. Engage in contractionary fiscal policy and run a budget deficit if necessary. d. Engage in expansionary fiscal policy and balance the budget.
b
Keynes used the term "the paradox of thrift" to explain a situation where: a. Paradoxically, decreased household saving is always good for the economy regardless of which phase of the business cycle the economy is in. b. Households saving during an economic contraction has the paradoxical effect of hurting those same households in the short-run. c. Households saving during an economic expansion has the paradoxical effect of hurting those same households in the short-run. d. Paradoxically, increased household saving is always good for the economy regardless of which phase of the business cycle the economy is in.
b
President Obama was advised by Keynesian economists during his 8 years in office. His response to the "great recession" of 2008-2009 was Keynesian. Which of the following policies did Obama implement: a. Increased regulation of the financial sector and cut federal assistance to the states. b. Funded "shovel ready" infrastructure projects and cut payroll taxes. c. Deregulated the financial sector and cut corporate income taxes. d. Increased spending on defense and cut taxes on high-income households.
b
The U.S. economy goes into a recession and the president turns to his Council of Economic Advisors for policy advice. If his economic advisors are laissez-faire economists their advice might include which of the following: a. Reduce income and payroll taxes and run a budget deficit. b. Balance the budget and reduce regulations on business. c. Balance the budget and increase regulations on business. d. Increase government spending and run a budget deficit.
b
When the economy started to contract and was moving towards a deep depression, neoclassical economists advised President Herbert Hoover: a. To cut taxes and increase spending in order to run a budget surplus. b. To cut spending in order to balance the budget. c. To cut taxes and run a budget deficit. d. To raise taxes and decrease spending in order to run a budget surplus.
b
When the economy started to contract and was moving towards a deep depression, neoclassical economists advised President Herbert Hoover: a. To raise taxes and decrease spending in order to run a budget surplus. b. To cut spending in order to balance the budget. c. To cut taxes and increase spending in order to run a budget surplus. d. To cut taxes and run a budget deficit.
b
A new government in Pakistan redistributes income from high income Pakistani households to low-income Pakistani households. This will likely: a. Make the Pakistani AD curve steeper. b. Shift the Pakistani AD curve to the left. c. Shift the Pakistani AD curve to the right. d. Make the Pakistani AD curve flatter.
c
Between 2007 and 2009, the U.S. unemployment rate rose from under 5 percent to over 10 percent. A Keynesian economist would most likely blame this increase in unemployment on: a. An increase in the bargaining power of labor unions. b. An increase in the minimum wage. c. A decline in the level of aggregate demand. d. A decline in aggregate supply.
c
In the summer of 1953, the Korean War ended and US government expenditures decreased. In terms of the AS-AD model, this change should have: a. Made the AD curve steeper. b. Shifted the AD curve to the right. c. Shifted the AD curve to the left. d. Made the AD curve flatter.
c
Keynes argued that when an economy is a depression or deep recession: a. The long-run is a more important policy concern than the short-run. b. Both the short-run and the long-run are equally important. c. The short-run is a more important policy concern than the long-run. d. The distinction between the short-run and the long-run is irrelevant.
c
Keynes used the term "the paradox of thrift" to explain a situation where: a. Paradoxically, decreased household saving is always good for the economy regardless of which phase of the business cycle the economy is in. b. Households saving during an economic expansion has the paradoxical effect of hurting those same households in the short-run. c. Households saving during an economic contraction has the paradoxical effect of hurting those same households in the short-run. d. Paradoxically, increased household saving is always good for the economy regardless of which phase of the business cycle the economy is in.
c
Keynes was a neoclassically trained economist who through his research came to believe that the classical argument that any government attempts to increase aggregate demand (AD) would lead to an increase in inflation without any increase in real GDP was incorrect because: a. In a depression or severe recession the long-run aggregate supply curve was likely to be vertical. b. In a depression or severe recession the long-run aggregate supply curve was likely to be upward sloping. c. In a depression or severe recession the long-run aggregate supply curve was likely to be horizontal. d. In a depression or severe recession the long-run aggregate supply curve was likely to be downward sloping.
c
Keynesian economists are most likely to recommend which of the following government actions during a recession: a. Expansionary monetary policy and contractionary fiscal policy. b. Contractionary fiscal policy and contractionary monetary policy. c. Expansionary fiscal policy and expansionary monetary policy. d. Expansionary fiscal policy and contractionary monetary policy.
c
The laissez-faire policy prescription to eliminate unemployment was to: a. Strengthen unions and government regulations protecting unions and workers. b. Increase real wages so that people are encouraged to work. c. Eliminate labor unions and government policies that hold real wages too high. d. Have government guarantee jobs for everyone.
c
When aggregate demand is declining and the price level needs to fall to bring about equilibrium, pressure for the price level to fall brings expectations of falling aggregate demand, lower asset prices, and financial panics triggered by the decline in the value of financial assets. If these forces are strong enough, these dynamic effects can create a: a. A rightward shift in the long-run aggregate supply curve. b. Rightward shift in the aggregate demand curve. c. Leftward shift in the aggregate demand curve. d. Leftward shift in the short-run aggregate supply curve.
c
According to Keynesian economists which of the following would likely increase aggregate demand in the U.S. economy? a. U.S. consumers develop a preference for European made cars because of their greater fuel efficiency and sleeker designs. b. Particularly bad winter weather throughout the United States keeps US consumers away from shopping malls. c. Congress increases payroll taxes on all American workers with incomes above $18,500. d. The U.S. wins the 2022 soccer World Cup in Qatar (beating Argentina 4-3 in the final), the win increases expectations in the United States of an expansionary economy. Americans become increasingly optimistic about the economic future of the United States.
d
An expansionary fiscal policy would be countercyclical if it was enacted after: a. Inflation rose. b. Unemployment fell. c. Equilibrium income rose above potential income. d. Equilibrium income fell below potential income.
d
Austerity policies during recessions are typically favored by: a. Institutionalist economists. b. Keynesian economists. c. Marxist economists. d. Neo-classical economists.
d
Business and consumer confidence suffer a significant decline. Businesses begin to shelve expansion plans and consumers delay plans to purchase durable goods. Both these actions push the U.S. economy into a deep recession. Which of the following represents the most likely Keynesian response to the decrease in aggregate demand: a. The U.S. Commerce Department pressures governments around the globe to purchase more U.S. goods and services. b. The U.S. Environmental Protection Agency, the agency responsible for protecting the environment, removes most environmental regulations on business, allowing business to produce without worrying about the consequences of negative externalities. c. The Federal Reserve increases the federal funds rate, causing other interest rates in the economy to increase. d. The U.S. Treasury Department issues checks of $5,000 to all households with annual incomes below $75,000.
d
During the Great Depression, output fell very sharply and the government's budget went into deficit (that is tax revenues fell beneath government outlays.) In response, the Roosevelt administration passed a tax increase designed to reduce the budget deficit. This is an example of: a. Fiscal fine tuning. b. Countercyclical fiscal policy. c. Keynesian economics. d. Procyclical fiscal policy.
d
If the U.S. economy was experiencing a recession a Keynesian economist would likely advise which of the following policy prescriptions? a. The government should reduce income taxes on households earning over $200,000 per year. b. The government should cut the amount of time the unemployed are entitled to receive unemployment benefits. c. The government should reduce the average SNAP (food stamps) benefit from $1.50 per meal per person to $1.15 per meal per person. d. The government should reduce income taxes on households earning less than $200,000 per year.
d
If the economy was contracting Keynesian economists would most likely recommend that the government: a. Engage in contractionary fiscal policy and run a budget surplus. b. Engage in contractionary fiscal policy and run a budget deficit if necessary. c. Engage in expansionary fiscal policy and balance the budget. d. Engage in expansionary fiscal policy and run a budget deficit if necessary.
d
Imagine a world where laissez-faire and Keynesian economists agree that government should engage in expansionary fiscal and monetary policies during severe recessions. Which of the following might still prevent the policies from moving the economy back to potential GDP? a. The political implementation of the policies is delayed by partisan bickering between Democrats and Republicans. b. The federal government implements the policies in a timely manner, but local and state governments reduce their spending by an amount equal to the increase in federal spending. c. The federal budget is in deficit and the government has great difficulty borrowing in the market. d. All of the above.
d
Keynesian economists would likely argue in favor of engaging in expansionary monetary policy: a. In the run up to a presidential election. b. During an unsustainable economic expansion. c. When the unemployment rate corresponds to full employment. d. During an economic recession.
d
Monetary policy involves: a. Taxation and government spending. b. Lowering taxes on corporations. c. Printing money. d. Managing the money supply.
d
Over much of the last 40 years U.S. governments have often ignored the advice of Keynesian economists and engaged in pro-cyclical fiscal policy - decreasing taxes and/or increasing spending during economic expansions. Which of the following would best explain this behavior: a. U.S. politicians of the period misunderstand Keynesian economic theory. b. There is tremendous political pressure to give Americans back their money when economic times are good. c. Politicians care about their legacy and want to be seen as the leaders who cut taxes and/or engaged in prestigious infrastructure/spending projects. d. Both B and C.
d
Which of the following is most likely the case during a recession? a. Keynesian economists argue that the government should not take a role in creating jobs for unemployed workers. b. Keynesian economists lobby government to eliminate the minimum wage and unemployment benefits. c. Keynesian economists make the case to government that unemployment is the individual's problem and therefore requires no corrective action from government. d. Keynesian economists argue in favor of extending unemployment benefits and funding job-training schemes.
d
The paradox of thrift occurs when: a. An increase in saving reduces output. b. Saving is unrelated to output. c. An increase in saving raises output. d. A decrease in saving reduces output.
a
A fall in the income of an important trading partner of the U.S. will most likely cause: a. An increase in U.S. exports, so the U.S. aggregate demand curve shifts right. b. A reduction in U.S. exports, so the U.S. aggregate demand curve shifts left. c. A reduction in U.S. exports, so the U.S. aggregate demand curve shifts right. d. An increase in U.S. exports, so the U.S. aggregate demand curve shifts left.
b
Between 2007 and 2011 as a result of the "great recession", the U.S. unemployment rate rose from under 5 percent to over 10 percent. A Keynesian economist would most likely blame this increase in unemployment on: a. A decline in the level of aggregate demand. b. A decline in aggregate supply. c. An increase in the bargaining power of labor unions. d. An increase in the minimum wage.
b
Which of the following is an example of an expansionary fiscal policy: a. A decrease in government spending. b. An increase in the money supply. c. An increase in government spending. d. An increase in taxes.
c
