Keynesians - Intermediate Macro Exam 2

Question 1

What are the components of Aggregate Demand?

Answer 1

Consumption + Investments + Government Spending + Net Exports

Question 2

What is a reason for sticky wages?

Answer 2

Long-term contracts

Question 3

According to Keynesian business cycle theory, if consumption and investment fall, what will happen to government spending?

Answer 3

It will also fall

Question 4

According to Keynesian business cycle theory, what should the government do in response to a recession?

Answer 4

Increase government spending (Fiscal Policy)

Lower Interest Rates

Expand the money supply (Monetary Policy)

Question 5

What are some problems with Keynesian business cycle theory?

Answer 5

It does not predict stagflation.

Falling aggregate demand may be a symptom, not cause, of recession.

Question 6

Efficiency Wage

Answer 6

The wage paid above the market equilibrium wage. (The minimum wage)

Question 7

Liquidity Trap

Answer 7

A situation where you have an increase in the money supply, increasing inflation, but the demand for money stays the same or decreases.

Question 8

There is a POSITIVE relationship between inflation and economic growth. True or False

Answer 8

True

Question 9

There is a NEGATIVE relationship between inflation rate and unemployment. True or False

Answer 9

True

Question 10

How do you find the natural rate of unemployment?

Answer 10

Frictional Unemployment (job search) + Structural Unemployement (Institutions)

Question 11

How do Keynesians control consumer spending?

Answer 11

By raising taxation during a boom, and lowering taxation during a bust.

Question 12

Keynesians believe there will always be unemployment. True or False

Answer 12

True

Question 13

What is Says Law, and do Keynesians accept or reject it?

Answer 13

Says Law: Supply creates its own demand.

Rejects: In Keynes’s model output and employment are determined by effective demand.