ECON 201 ECON201 Keynesian & Neoclassical Economics Pretest Answers

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ECON 201 ECON201 Keynesian & Neoclassical Economics Pretest Answers

Pretest

1. Choose the BEST answer.

In the neoclassical view, the economy has a _____ to move back to potential GDP.

Rational tendency

Self-correcting tendency

Tendency to be unable

2. Choose the BEST answer

Which one of the following statements is akin to the Keynesian Perspective?

We should build things

Build it and they will come

People’s demand determines what is built

3. Choose the BEST answer

Suppose that a rise in business confidence has led to more investment in the economy and higher levels of output. In the short-run Keynesian analysis, the rise in aggregate demand will:

Lower unemployment

Exports will drop

Cause government to lower taxes

4. Choose the BEST answer

During the 1990s and early 2000s, the U.S. Phillips curve demonstrated:

Decreases in inflation with increases in unemployment

Decreases in both inflation and unemployment at the same time

Increase in inflation with decreases in unemployment

5. Choose the BEST answer

The economy is in a recession and the government wants to increase output. If the multiplier equals 3 and the government increases spending by 250, how much will output increase by?

100

750

200

50

6. Choose the BEST answer

The GDP gap shrinks:

As the government uses discretionary fiscal policy to reduce the budget deficit

As the Fed contracts the economy

As the economy recovers from recession

7. Choose ALL that apply

Neoclassical economists argue that:

The long run aggregate supply curve moves gradually to the left as potential GDP flows

The long run aggregate supply curve is vertical

The long run aggregate supply curve is at the level of potential GDP

8. Choose the BEST answer

Which of the following accurately contrasts short-run and long-run equilibrium?

-In short-run equilibrium, the aggregate demand curve intersects the short-run aggregate supply cure; in the long run equilibrium, the aggregate demand curve intersects the long –run aggregate supply curve

-in short-run equilibrium, the aggregate demand curve intersects the long-run aggregate supply curve; in long-run equilibrium, the aggregate demand curve intersects the short-run aggregate supply curve

-in short run-equilibrium, the aggregate demand curve intersects the short-run supply curve; in the long-run equilibrium, the aggregate demand curve intersects the long run aggregate expenditures curve

9. Choose the BEST answer

If markets throughout the global economy all have flexible and continually adjusting prices, then:

All market-oriented economies should implement coordinated wage reductions

Each economy must increase its aggregate demand and create additional employment

Each economy will head more quickly toward its natural rate of unemployment

All changes in prices and wages will create additional employment

Self-Checks

Choose ALL that apply

When the housing market crashed in 2007, Keynesian economists might have predicted a:

Decrease in home purchases, as expected future incomes declined

Decrease in government spending to match declining tax revenues

Decrease in consumption expenditure, as household wealth declined

Choose the BEST answer

A typical Keynesian Phillips curve:

Is vertical

Slopes upward

Slopes downward

Choose ALL that apply.

The value of the multiplier will fall due to these leakages a(n):

increase in government spending.

decrease in the propensity to import goods and services.

increase in the tax rate.

increase in the propensity to save.

Choose the BEST answer.

________ economists place an emphasis on ________ run economic performance.

Says : short

Keynesian : long

Neoclassical : long

Phillips : short

Choose ALL that apply.

In the neoclassical version of the AD/AS model, which of the following should you use to represent the long run AS curve?

An upward sloping short-run AS curve with a horizontal top.

The long run AS curve shifting right as productivity increases.

A vertical line drawn at the level of potential GDP.

The long-run AS curve shifting right as potential GDP expands.

Choose ALL that apply.

Neoclassical economists argue that:

the long run aggregate supply curve is at the level of potential GDP.

the long run aggregate supply curve is vertical.

the long run aggregate supply curve moves gradually to the left as potential GDP grows.

Choose the BEST answer.

Which of the following accurately contrasts short-run and long-run equilibrium?

In short-run equilibrium, the aggregate demand curve intersects the short-run aggregate supply curve; in the long-run equilibrium, the aggregate demand curve intersects the long-run aggregate expenditures curve.

In short-run equilibrium, the aggregate demand curve intersects the long-run aggregate supply curve; in long-run equilibrium, the aggregate demand curve intersects the short-run aggregate supply curve.

In short-run equilibrium, the aggregate demand curve intersects the short-run aggregate supply curve; in the long-run equilibrium, the aggregate demand curve intersects the long-run aggregate supply curve.

Choose the BEST answer.

If markets throughout the global economy all have flexible and continually adjusting prices, then:

all changes in prices and wages will create additional employment.

each economy will head more quickly toward its natural rate of unemployment.

all market-oriented economies should implement coordinated wage reductions.

each economy must increase its aggregate demand and create additional employment.

Quiz:

Choose the BEST answer.

Which of the following is a building block of neoclassical economics?

Cyclical unemployment.

Sticky wages and prices.

Wages and prices will adjust in a flexible manner.

The size of the economy is determined by aggregate demand.

Choose the BEST answer.

The neoclassical perspective on macroeconomics emphasizes that in the long run, the economy seems to rebound back to its ________ and its ________.

real GDP : natural rate of unemployment

potential GDP : cyclical unemployment rate

potential GDP : natural rate of unemployment

long term growth; cyclical unemployment

Choose the BEST answer.

The Keynesian economic framework is based on an assumption that:

an increase in government spending will cause the aggregate demand curve to shift to the left.

people can afford a high level of government services.

prices and wages are sticky and do not adjust rapidly.

Choose the BEST answer.

Fill in the blanks. According to the Keynesian perspective, the government ________ a role in managing the macroeconomy ________.

does not have : when there is unemployment and inflation

has : especially when actions by consumers, firms, and trading partners are weak or fall short of expectations

does not have : anytime

has : especially in the long run

Choose the BEST answer.

Moving along the aggregate demand curve, a decrease in real GDP demanded is associated with which of the following?

An increase in wealth.

A decrease in the price level.

An increase in income.

An increase in the price level.

Choose the BEST answer.

In the Keynesian version of the AD/AS model, which of the following should you use to represent the AS curve?

A horizontal line drawn at the existing aggregate price level.

The AS curve shifting as potential GDP expands.

An upward sloping curve with a vertical top.

The AS curve shifting as productivity increases.

Choose the BEST answer.

A horizontal AS curve means that changes in GDP will be caused by:

changes in potential output.

cyclical unemployment

changes in aggregate demand.

Choose the BEST answer.

What is the best explanation for the slope of the Neoclassical zone of the aggregate supply curve?

An increase in aggregate demand causes both real output and the price level to increase.

A small increase in aggregate demand when the economy is operating below its potential output will not have much effect on the price level.

A small an increase in aggregate demand when the economy is operating at potential output causes the price level to rise, with little or no effect on real output.

Choose the BEST answer.

When the economy is in a recession, the government will want to increase output. If the multiplier equals 2.5 and the government increases spending by 200, how much will output increase by?

900

500

300

Choose the BEST answer.

Assume an economy has a multiplier of 5. If a government stimulus program spends $500 million, what will be the resulting change in real GDP?

$2.5 billion

$5 billion

$100 million

$500 million

Choose the BEST answer.

The GDP gap shrinks:

as the Fed contracts the economy.

as the government uses discretionary fiscal policy to reduce the budget deficit.

as the economy recovers from recession.

Choose the BEST answer.

Over the long run, the GDP gap:

tends to be negative.

tends to be positive.

tends to be zero.

Choose the BEST answer.

A vertical AS curve means that the level of aggregate supply (or potential GDP) will determine the real GDP of the economy, regardless of the level of:

aggregate demand.

real unemployment.

cyclical unemployment.

Choose the BEST answer.

An increase in AD curve along the Neoclassical portion of the aggregate supply curve will result in:

a decrease in the price level.

no effect on the price level.

an increase in the price level.

Choose the BEST answer.

Why do neoclassical economists tend to put relatively more emphasis on long-term growth than on fighting recession?

The upward trend of potential GDP determines the rate of inflation.

Price and wage stickiness is reasonable in the short run.

In the long run, the size of the economy is determined by potential GDP.

Government focuses more on recession and cyclical unemployment.

Choose the BEST answer.

An accurate interpretation of the long-run aggregate supply curve acknowledges both that real GDP does not vary with the price level and the:

frictional unemployment is zero

total unemployment is zero

structural unemployment is zero

cyclical unemployment is zero

Choose ALL that apply.

If an economy experiences a decrease in aggregate demand due to a decline in consumer confidence and output falls below potential GDP, which of the following is likely to occur in the short run?

Increase in price inflation.

Less consumption and more saving.

Adjustment back to potential GDP.

A rise in unemployment.

Choose the BEST answer.

The Keynesian model focuses more on ________ and the neo-classical model focuses more on ________.

Short term fluctuations caused by business cycles : long-run determinants of output and employment.

Long-run determinants of output and employment : short term fluctuations caused by business cycles. Short term fluctuations caused by technological change and labor force growth : long-run determinants of output and employment.