In Keynesian analysis, firms produce output only if they expect it to sell.
Correct Answer
True
True. This premise is why Keynesians say real GDP in the short run depends on demand. Potential GDP depends on available labor, capital, and technology, but actual production depends on how much buyers want to purchase.
Category: Keynesian Premises
Question 2
Keynes argued that aggregate demand is stable and rarely changes unexpectedly.
Correct Answer
False
False. Keynes argued that aggregate demand is volatile and can change suddenly and unexpectedly, with business investment the most variable component. Those swings in demand are what drive recessions in the Keynesian view.
Category: Keynesian Premises
Question 3
During the 2020 pandemic recession, the federal government sent money to state and local governments and to households.
Correct Answer
True
True. Federal responses included direct aid to state and local governments, expanded unemployment insurance, small business loans, and stimulus checks to households. From a Keynesian standpoint, these measures supported aggregate demand when consumption and investment fell.
Category: Components of Demand
Question 4
Keynes argued that the Great Depression happened because the United States had far fewer factories, workers, and technologies in 1933 than in 1929.
Correct Answer
False
False. In 1933 the United States had about the same factories, workers, and technology as in 1929, yet output fell sharply. Keynes took this as evidence that the problem was too little demand, not a loss of capacity to supply.
Category: Keynesian Premises
Question 5
Tax incentives for investment make buying new capital goods more attractive to firms, raising aggregate demand.
Correct Answer
True
True. Tax incentives lower the after-tax cost of new capital goods, so firms invest more and aggregate demand shifts to the right. Removing such incentives or raising business taxes has the opposite effect.
Category: Components of Demand
Question 6
Higher energy prices raise the expected profits from investments that use a lot of energy, so they increase that kind of investment spending.
Correct Answer
False
False. It is lower energy prices that raise the expected profits from investments that use a lot of energy, encouraging firms to invest more. Higher energy prices reduce those expected profits and tend to discourage that investment.
Category: Components of Demand
Question 7
In the Keynesian view, the government's role is to keep aggregate demand high enough for full employment, not to set prices and wages throughout the economy.
Correct Answer
True
True. Keynes considered markets for individual goods and services useful and appropriate, but he held that aggregate demand could be too low to employ everyone. The government's job is to support total demand, not to set prices and wages or to run large corporations or industries.
Category: Role of Government
Question 8
Exports are subtracted from aggregate demand, while imports are added to it.
Correct Answer
False
False. Exports add to aggregate demand because they are spending on domestically produced output by foreign buyers. Imports are subtracted because they are spending on output produced in other countries.
Category: Components of Demand
Question 9
Keynes believed an economy could remain stuck in a recessionary gap, with high unemployment, for a significant period.
Correct Answer
True
True. Because wages and prices are sticky, a fall in aggregate demand can leave the economy at an equilibrium below potential GDP for a long time. That belief is why Keynes argued the government should act to close the gap rather than wait.
Category: Keynesian Premises
Question 10
Recent research suggests the real-world aggregate supply curve forms a sharp right angle at potential output.
Correct Answer
False
False. The right-angle shape is a simplification. Research suggests the real-world curve is very flat far below potential output, very steep above it, and curved in between, which is the shape that leads to the Phillips curve.
Category: Sticky Wages and Prices
Question 11
When aggregate demand falls and prices are sticky, unsold goods pile up because the quantity supplied exceeds the quantity demanded.
Correct Answer
True
True. If prices do not drop when demand falls, firms cannot sell all they produce, so excess supply appears as unsold goods. The same thing in labor markets shows up as unemployment, and when it happens across many markets the economy is in recession.
Category: Sticky Wages and Prices
Question 12
In the simplified Keynesian model, once the economy is already producing at potential GDP, a further increase in aggregate demand raises real GDP rather than the price level.
Correct Answer
False
False. In the simplified Keynesian model the aggregate supply curve is horizontal below potential output and vertical at it. Once the economy is at potential, an increase in aggregate demand raises only the price level, while a decrease lowers only output.
Category: Keynesian Premises
Question 13
The expenditure multiplier applies to an increase in any type of autonomous spending, not only government spending.
Correct Answer
True
True. Any autonomous increase in spending, whether by consumers, firms, government, or foreign buyers, becomes income for others and sets off further rounds of spending. In the Keynesian view, the multiplier also works in reverse, which is how Keynesians explain why the collapse in investment during the Great Depression was followed by a much larger drop in real GDP.
Category: Expenditure Multiplier
Question 14
In the 1960s, economists rejected the idea that the Phillips curve offered policymakers a menu of choices.
Correct Answer
False
False. In the 1960s, many economists treated the Phillips curve as a policy menu, from which a nation could pick low inflation with high unemployment, high inflation with low unemployment, or a point in between. That view broke down in the 1970s when the curve shifted.
Category: Phillips Curve
Question 15
If wages and prices did not fall at all, the aggregate supply curve would be completely flat below potential GDP.
Correct Answer
True
True. With fully sticky wages and prices, a fall in aggregate demand cannot lower the price level, so all of the adjustment happens through lower real GDP. That is shown by a flat aggregate supply curve below potential GDP.
Category: Sticky Wages and Prices
Question 16
A downward-sloping Phillips curve is considered a reliable guide over periods of several decades.
Correct Answer
False
False. A downward-sloping Phillips curve is a valid description only over short-run periods of several years. Over longer periods the curve can shift up, as in the 1970s and early 1980s, or down, as in the early 1990s.
Category: Phillips Curve
Question 17
Supply shocks and changes in inflation expectations can both shift the Phillips curve.
Correct Answer
True
True. Supply shocks such as the oil crisis of the mid-1970s, and changes in what people expect inflation to be, both shift aggregate supply and therefore the Phillips curve. The tradeoff may hold while people expect no inflation but can vanish once they come to expect it.
Category: Phillips Curve
Question 18
Like the Great Recession of 2007-2009, the 2020 recession was triggered by the bursting of a housing bubble.
Correct Answer
False
False. The Great Recession followed the bursting of a housing bubble, but the 2020 recession was triggered by a virus that caused illness and death and led to large-scale public health measures. It was unusual for that reason.
Category: Role of Government
Question 19
Keynes suggested that in a deep depression, the specific uses of government spending matter less than raising aggregate demand enough to reach potential GDP.
Correct Answer
True
True. Keynes argued that in a severe depression the key is to increase aggregate demand enough to restore full employment. He made the point with tongue-in-cheek examples such as building monuments or burying money for mining companies to dig up.
Category: Role of Government
Question 20
Keynesian analysis is considered better suited to explaining long-run growth than short-run fluctuations and recessions.
Correct Answer
False
False. The Keynesian emphasis on aggregate demand and sticky prices is most useful for understanding short-run fluctuations, recessions, and cyclical unemployment. It is less well suited to long-run analysis, which is the focus of the neoclassical perspective.
Category: Role of Government