Chapter 11

Question 1

Which question did John Maynard Keynes pose for the classical economists?

Answer 1

What if savings and investment were not equal?

Question 2

Our economy is always tending towards full employment according to

Answer 2

the classical economists.

Question 3

At equilibrium GDP

Answer 3

Savings = investment and aggregate demand = aggregate supply.

Question 4

Laissez-faire economics was advocated by

Answer 4

the classicals, but not by Keynes.

Question 5

Say’s law states that

Answer 5

supply creates its own demand.

Question 6

People work, according to Jean Baptiste Say, so that they can

Answer 6

spend

Question 7

According to the classical economists, if the amounts of money people are planning to invest is greater than the amount that people want to save,

Answer 7

interest rates will rise and savings will rise.

Question 8

Each of the following supports the classical theory of employment except

Answer 8

government spending programs.

Question 9

Which best describes the classical theory of employment?

Answer 9

We will occasionally have some unemployment, but our economy will automatically move back toward full employment.

Question 10

Keynes considered full employment GDP to be

Answer 10

a rare occurrence.

Question 11

The Keynesian and classical aggregate supply analyses

Answer 11

are very similar.

Question 12

At equilibrium GDP, aggregate demand _______ aggregate supply and savings _______ investment.

Answer 12

is equal to; is equal to

Question 13

To fight a depression, Keynes said that the government should

Answer 13

spend a lot of money.

Question 14

The notion that everything the economy produces is purchased

Answer 14

sums up Say’s law.

Question 15

Classical economics was based upon the belief that

Answer 15

full employment was the natural state of the economy and that government should not interfere with the private market forces of supply and demand.

Question 16

Keynesian economics finds fault with the classical economic argument that wage and price flexibility would guarantee full employment because

Answer 16

large unions and businesses resist wage and price cuts and lower wages mean decreased incomes and consumer spending.

Question 17

Keynesian theory

Answer 17

is primarily demand-oriented.

Question 18

“The economy can be in equilibrium, with aggregate supply equal to aggregate demand, at a level substantially below the full employment level of output.” This statement best describes the views of

Answer 18

the Keynesians.

Question 19

According to the classical economists

Answer 19

if unemployment appears, it would soon disappear because of a reduction in interest rates, wages, and prices.

Question 20

The principal cause of the Great Depression of the 1930s was

Answer 20

a collapse in aggregate demand.

Question 21

Classical employment theory holds that

Answer 21

All of the choices are true of classical employment theory.

Question 22

Classical economists believed that

Answer 22

flexible interest rates, wages, and prices would assure full employment.

Question 23

According to the classical economists, an increase in unemployment

Answer 23

would be reduced by a decrease in interest rates, wages, and prices.

Question 24

The Keynesian point of view suggests that

Answer 24

demand creates its own supply.

Question 25

Unintended inventory changes

Answer 25

are signals to business firms to increase or cut production.