Title: Keynesian and Neoclassical Economics
Course: Macro Quiz Test

Q: Keynes argued that the ________ was unable to keep the economy at full employment. As a result, ________ should take an active role in managing the economy.
- public sector; government
- private sector; corporations
- private sector; government
A: private sector; government

Q: Keynes argued that the private sector was ________. As a result, government should ________ in managing the economy.
- able to keep the economy at full employment; take an passive role
- unable to keep the economy at full employment; take an passive role
- unable to keep the economy at full employment; take an active role
A: unable to keep the economy at full employment; take an active role

Q: Keynes believed that the government should ________ to get the economy out of recession:
- increase taxes and reduce government spending.
- increase taxes and/or increase spending.
- decrease taxes and/or increase government spending.
A: decrease taxes and/or increase government spending.

Q: According to Keynes what should the government do improve economic conditions during a recession?
- reduce government spending and increase taxes.
- increase spending and/or increase taxes.
- increase government spending and/or decrease taxes
A: increase government spending and/or decrease taxes

Q: Which of the following statements represents a Keynesian point of view of macroeconomics?
- Focus on long-term growth in the economy.
- Aggregate supply is the primary determinant of economic output.
- Increases in aggregate demand can reduce unemployment.
A: Increases in aggregate demand can reduce unemployment.

Q: Which one of the following statements best represents the Keynesian Perspective?
- Build it and they will come.
- Build things so long as the supply is there.
- People’s demand determines what is built.
A: People’s demand determines what is built.

Q: Consumption, investment, government spending, and net exports are
- all complementary elements of a market economy.
- some of the opposing elements found in a market economy.
- all components of aggregate demand.
A: all components of aggregate demand.

Q: What are the components included in aggregate demand?
- Consumption, private sector spending, and net imports
- Production, investment, private spending, and net imports
- Consumption, investment, government spending, and net exports.
A: Consumption, investment, government spending, and net exports.

Q: When the housing market crashed in 2007, Keynesian economists might have predicted a
- increase in home purchases, as expected future incomes increased.
- decrease in government spending to match declining tax revenues.
- decrease in consumption expenditure, as household wealth declined.
A: decrease in consumption expenditure, as household wealth declined.

Q: If Keynesian economists were analyzing the oncoming recession starting in 2007 from the housing market crash, what might they have predicted?
- Expected future incomes increasing and an increase in home purchases.
- Declining tax revenues with cause a decrease in government spending.
- A decline in household wealth leading to a decrease in consumption expenditure.
A: A decline in household wealth leading to a decrease in consumption expenditure.

Q: Jontel got a raise, which may help the economy since
- she will likely put more money in savings.
- she will likely hoard more money to prepare for fluctuations in the economy.
- she will likely consume more goods and services.
A: she will likely consume more goods and services.

Q: If Deondre gets a raise at work, his disposable income will increase and he will be likely to
- put more money in his savings account.
- save more money to prepare for fluctuations in the economy.
- consume more goods and services.
A: consume more goods and services.

Q: Which of the following is NOT considered a type of business investment expenditure?
- office structure
- producer’s durable equipment
- apartment buildings
A: apartment buildings

Q: Of the following, which is an example of a type of business investment expenditure?
- Townhouses
- Apartment buildings
- A producer’s durable equipment
A: A producer’s durable equipment

Q: When firms determine how much investment spending to make, they will strongly consider ________.
- past profits
- their wealth
- interest rates
A: interest rates

Q: What is a key component considered by businesses when determining the amount to take on with investment spending?
- previous profits
- a businesses labor pool
- interest rates
A: interest rates

Q: Fill in the blanks. According to the Keynesian perspective, the government ________ play a role in managing the macroeconomy ________.
- should not; especially when actions by consumers, firms, and trading partners fall short of expectations
- should not; when there is unemployment and inflation
- should; when the aggregate demand does not match the aggregate supply
A: should; when the aggregate demand does not match the aggregate supply

Q: If an economic decision is based on the Keynesian perspective, it proposes that the government should ________ in managing the macroeconomy when ________.
- not play a role; actions by consumers, firms, and trading partners fall short of expectations
- play a role; there is inflation and unemployment
- play a role; the aggregate demand has a significant gap with the aggregate supply
A: play a role; the aggregate demand has a significant gap with the aggregate supply

Q: What are the main ways in which government influences aggregate demand?
- increase or decrease interest rates; lower or raise tariffs
- increase or decrease the size of the military; lower or raise export production
- increase or decrease spending; lower or raise tax rates
A: increase or decrease spending; lower or raise tax rates

Q: Aggregate demand is influenced by the government in through what significant ways?
- raising or lowering tariffs; decreasing or increasing interest rates
- raising or lowering export production; decreasing or increasing business confidence
- raising or lowering tax rates; decreasing or increasing spending
A: raising or lowering tax rates; decreasing or increasing spending

Q: According to the Keynesian perspective, reasons for an increase in aggregate demand include
- decrease in foreign demand for net exports.
- relative price increase of U.S. goods.
- increase in foreign demand for net exports.
A: increase in foreign demand for net exports.

Q: Which of the following scenarios, from the Keynesian perspective, increases aggregate demand?
- Decrease in net exports because of lack of foreign.
- U.S. goods increasing in relative price.
- Increase in net exports because of foreign demand.
A: Increase in net exports because of foreign demand.

Q: If U.S. goods are relatively cheaper compared with goods of foreign places, then U.S. exports are likely to rise. This would make the aggregate demand curve ________.
- shift to the left
- remain the same.
- shift to the right
A: shift to the right

Q: Consider the following scenario. If foreign goods are relatively more expensive than U.S. goods, exports from the U.S. rise. How would this scenario make the aggregate demand curve change?
- The AD curve would shift to the left.
- The AD curve would remain unchanged.
- The AD curve would shift to the right.
A: The AD curve would shift to the right.

Q: Keynesian economics explains that recessions and depressions occur because:
- aggregate demand is high enough to motivate firms to operate at full employment.
- there are long-term shifts in aggregate supply.
- the macroeconomy may adjust only slowly to shifts in aggregate demand because wages are sticky.
A: the macroeconomy may adjust only slowly to shifts in aggregate demand because wages are sticky.

Q: What are some of the reasons, according to Keynesian analysis, of why economies have recessions and depressions?
- Businesses operate at full employment when aggregate demand is high enough to motivate them to hire more labor.
- Over the long-term, the aggregate supply curve shifts.
- The larger macroeconomy tends to adjust slowly to shifts in aggregate demand because of sticky prices.
A: The larger macroeconomy tends to adjust slowly to shifts in aggregate demand because of sticky prices.

Q: The Keynesian view of economics assumes that
- the economy must focus on long-term growth.
- economic output is primarily determined by aggregate supply.
- wages are sticky.
A: wages are sticky.

Q: What does a Keynesian analysis of economics assume?
- Macroeconomics must focus on growth in the long-term.
- It is aggregate supply that is the primary determinant of economic output..
- Prices are sticky.
A: Prices are sticky.

Q: According to macroeconomic theory, evidence that high unemployment may be accompanied by low inflation, and low unemployment may be accompanied by high inflation is illustrated by the
- neoclassical aggregate demand-aggregate supply model.
- Keynesian cross diagram.
- Keynesian Phillips curve tradeoff.
A: Keynesian Phillips curve tradeoff.

Q: If an economist is using the macroeconomic theory that low inflation may be associated with high unemployment, and high inflation may contribute to low unemployment, what theory is the economist considering?
- A neoclassical aggregate demand-aggregate supply model.
- A Keynesian cross diagram.
- The Keynesian Phillips curve tradeoff.
A: The Keynesian Phillips curve tradeoff.

Q: 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 to changes in aggregate demand.
A: prices and wages are sticky and do not adjust rapidly to changes in aggregate demand.

Q: Which of the following assumptions is based on a Keynesian economic framework?
- The aggregate demand curve can be shifted to the left through an increase in government spending.
- A large increase in government services is affordable to the tax base.
- Changes in aggregate demand prices does not cause wages and prices to quickly adjust because they are both sticky.
A: Changes in aggregate demand prices does not cause wages and prices to quickly adjust because they are both sticky.

Q: Price changes can cause substantial cost to company resources. An example of this is called ________.
- atm costs
- shoe leather costs
- menu costs
A: menu costs

Q: An example of ________ is when price changes cost a firm substantial resources.
- media costs
- resource costs
- menu costs
A: menu costs

Q: During recessionary times it can be hard to coordinate lower wages for workers because of the ________.
- discoordination argument
- relative wage theory
- coordination argument
A: coordination argument

Q: If an economy falls into a recession, there is no way to coordinate lower wages across the economy for workers according to Keynes because of the ________.
- complexity argument
- progressive wage theory
- coordination argument
A: coordination argument

Q: If price changes happen frequently, customers and consumers can become irritated or confused. An example like this is called a ________.
- growth cost
- opportunity cost
- menu cost
A: menu cost

Q: An example of a ________ is when the changes in prices happen often enough to cause customers and consumers to be confused or angry.
- opportunity cost
- frequency cost
- menu cost
A: menu cost

Q: When looking at an economic graph and the aggregate supply curve is flatter than the market supply curve for goods, services or labor (micro) and the price-levels are not falling, this is an example of a(n)
- microeconomic externality.
- positive externality.
- macroeconomic externality.
A: macroeconomic externality.

Q: Consider an economic graph where the aggregate supply curve is flatter than the market supply curve for services or labor or goods (micro) where price-levels don’t fall. This graph is an example of a(n)
- microeconomic externality.
- negative externality.
- macroeconomic externality.
A: macroeconomic externality.

Q: What is true about the expenditure multiplier?
- GDP does not change proportionally.
- A larger change in expenditure causes a smaller change in GDP.
- GDP changes when the aggregate expenditure changes.
A: GDP changes when the aggregate expenditure changes.

Q: Which statement is the most accurate explanation of the expenditure multiplier?
- As GDP changes it does so disproportionally.
- A small change in GDP is caused by a large change in expenditure.
- When the aggregate expenditure changes, GDP changes.
A: When the aggregate expenditure changes, GDP changes.

Q: Of the following statements, which is inaccurate for explaining the expenditure multiplier effect?
- The multipliers value is greater than one.
- The multiplier is a ratio of the change in aggregate expenditure to the change in GDP.
- When the expenditure multiplier changes GDP does not change.
A: When the expenditure multiplier changes GDP does not change.

Q: Which of the following statements about the expenditure multiplier effect is a false statement?
- The multiplier has a value greater than one.
- The multiplier is a ratio of the change in GDP to the change in aggregate expenditure.
- GDP does not change when the expenditure multiplier changes.
A: GDP does not change when the expenditure multiplier changes.

Q: Which is true about the expenditure multiplier effect?
- The initial increase in spending has a smaller impact on the economy than the initial cash infusion.
- The initial increase in spending has no impact.
- The initial increase in spending has a larger impact on the economy than the initial cash infusion.
A: The initial increase in spending has a larger impact on the economy than the initial cash infusion.

Q: Which one of the following statements is accurate in explaining the expenditure multiplier effect?
- A cash infusion into an economy has a larger impact than an increase is spending.
- There is no impact from an increase in spending.
- A cash infusion has less of an impact on an economy than an increase in spending.
A: A cash infusion has less of an impact on an economy than an increase in spending.

Q: Since the change in GDP is a greater change than in the expenditure model the multiplier has a value ________.
- less than one
- equal to one
- greater than one
A: greater than one

Q: In comparison with an expenditure module, the multiplier effect produces a great change in GDP and therefore its value is ________.
- less than one
- equal to one
- greater than one
A: greater than one

Q: Why does the multiplier effect exist?
- Because a change in expenditures induces households to save.
- Because a change in expenditures induces the country to export.
- Because a change in expenditures leads to changes in income, which generates further spending.
A: Because a change in expenditures leads to changes in income, which generates further spending.

Q: What is the reason behind why the multiplier effect exists?
- A change in spending induces households to save.
- A change in spending induces the country to export.
- Income is changed when there is a change in spending, which generates further spending.
A: Income is changed when there is a change in spending, which generates further spending.

Q: If government spending increases by $4 billion and real GDP increases by $8 billion, the expenditure multiplier must be ________.
- 1.5
- 3.0
- 2.0
A: 2.0

Q: If government spending increases by $3 billion and real GDP increases by $4.5 billion, the expenditure multiplier must be ________.
- 4.5
- 3.0
- 1.5
A: 1.5

Q: The government decides to increase its spending by $6 billion. Over time the real GDP increased by $9 billion. The expenditure multiplier is ________ 1.5.
- lower than
- higher than
- equal to
A: equal to

Q: The government decides to increase its spending by $3 billion. Over time the real GDP increased by $12 billion. The expenditure multiplier is ________ 3.5.
- lower than
- equal to
- higher than
A: higher than

Q: If the MPC is 75%, what is the spending multiplier?
- .75
- 1.33
- 4
A: 4

Q: What is the spending multiplier if the MPC is 62%?
- 1.61
- .62
- 2.63
A: 2.63

Q: If the expenditure multiplier is 2.5 and the government spending increases by $4 billion, what would be the increase in the real GDP?
- $8 billion
- $6.5 billion
- $10 billion
A: $10 billion

Q: If government spending increased by $5 billion and the expenditure multiplier is 3.2, what would be the increase in the real GDP?
- $8.2 billion
- $15 billion
- $16 billion
A: $16 billion

Q: When real GDP is less than potential GDP, the economy is experiencing
- inflation.
- full employment.
- a GDP gap.
A: a GDP gap.

Q: When real GDP is more than potential GDP, the economy is experiencing
- inflation.
- full employment.
- a GDP gap.
A: a GDP gap.

Q: 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.
A: as the economy recovers from recession.

Q: When does the GDP gap shrink?
- It shrinks as the economy is contracting with government intervention.
- It shrinks as the government reduces the budget deficit through discretionary fiscal policy.
- It shrinks as the economy recovers from recession.
A: It shrinks as the economy recovers from recession.

Q: When the economy experiences an inflationary boom, the GDP gap is:
- positive.
- zero.
- negative.
A: negative.

Q: The GDP gap is ________ when the economy experiences an inflationary boom.
- positive
- zero
- negative
A: negative

Q: What happens to the GDP gap when the economy is experiencing a bust, or recession?
- It tends to be negative.
- It tends to be zero.
- It tends to be positive.
A: It tends to be positive.

Q: When considering an economy in recession, how does the GDP gap react?
- It ends up being negative.
- It ends up being zero.
- It ends up being positive.
A: It ends up being positive.

Q: Keynesian economists believe that the economy needs to be influenced in order to correct itself from the effects of unemployment and inflation. This can be done through ________ policies.
- monetary
- accounting
- fiscal
A: fiscal

Q: What type of policies does a Keynesian economist say need to be used to influence the economy to correct for unemployment and inflation?
- production policies
- reduction policies
- fiscal policies
A: fiscal policies

Q: Keynesians believe the economy is characterized by recessions and inflationary booms which can cause unemployment and inflationary concerns. The solutions to a recession causing unemployment is expansionary fiscal policy in the form of ________.
- tax increases and decreased government spending
- increasing the discount rate to influence the fed fund rate
- tax cuts and increased government spending
A: tax cuts and increased government spending

Q: The economy modulates between recessions, which cause unemployment, and inflationary times causing inflationary problems. According to the Keynesian economic view, during a recession with vast unemployment, expansionary fiscal policies should be used. These type of policies include ________.
- decreased government spending and tax increases
- influencing the federal funding rate by increasing the discount rate
- increasing government spending and tax cuts
A: increasing government spending and tax cuts

Q: Keynesians believe the economy is characterized by recessions and inflationary booms which can cause unemployment and inflationary concerns. The solutions to a boom causing inflation (high price levels) is contractionary fiscal policy in the form of ________.
- tax cuts and increased government spending
- increasing the discount rate to influence the fed fund rate
- tax increases and decreased government spending
A: tax increases and decreased government spending

Q: The economy moves between recessions (high unemployment), and inflationary times causing inflationary problems. According to the Keynesian economic view, during a briskly productive economy which causes inflation and prices to rise, contractionary fiscal policies should be used. These type of policies include ________.
- increasing government spending and tax cuts
- influencing the federal funding rate by increasing the discount rate
- decreased government spending and tax increases
A: decreased government spending and tax increases

Q: The Keynesian approach focuses on aggregate demand and sticky prices has proven useful in understanding how the economy fluctuates in the ________-run and why recessions and cyclical unemployment occur.
- long
- gap
- short
A: short

Q: Unlike the neoclassical approach to the economy, the Keynesian approach focuses on sticky prices and aggregate demand. This focus is advantageous for understanding the reason cyclical unemployment and recessions occur, as these fluctuations take place in the ________ -run.
- long
- gap
- short
A: short

Q: Which of the following is a building block of neoclassical economics?
- The size of the economy is determined by aggregate demand.
- Wages and prices tend to be sticky.
- Most unemployment is cyclical.
- Wages and prices will adjust in a flexible manner.
A: Wages and prices will adjust in a flexible manner.

Q: What is one of the cornerstones on which neoclassical economics is built?
- Aggregate demand determines the size of the economy.
- Prices and wages lend themselves to stickiness.
- Unemployment is mostly cyclical.
- Prices and wages will adjust in a flexible manner.
A: Prices and wages will adjust in a flexible manner.

Q: The neoclassical perspective on macroeconomics emphasizes that in the long run, the economy seems to rebound back to its ________ and its ________.
- long-term growth; cyclical unemployment
- potential GDP; cyclical unemployment rate
- real GDP; natural rate of unemployment
- potential GDP; natural rate of unemployment
A: potential GDP; natural rate of unemployment

Q: In the neoclassical view, the economy has a ________ to move back to potential GDP.
- rational tendency
- tendency to be unable
- self-correcting tendency
A: self-correcting tendency

Q: From a neoclassical viewpoint, government should focus less on
- long-term growth.
- flexible prices.
- government stimulus spending.
A: government stimulus spending.

Q: Government, from a neoclassical perspective, should have the intent to focus less
- on growth in the long-term.
- on prices that are flexible.
- on stimulus spending.
A: on stimulus spending.

Q: ________ economists place an emphasis on ________-run economic performance.
- Phillips; short
- Keynesian; long
- Neoclassical; long
A: Neoclassical; long

Q: What type of economic viewpoint puts an emphasis on long run economic performance?
- Phillips
- Keynesian
- Neoclassical
A: Neoclassical

Q: From a neoclassical view, which of the following is least important?
- encouraging long-term growth
- stimulating potential GDP
- increasing aggregate demand to fight unemployment
A: increasing aggregate demand to fight unemployment

Q: Which of the following is least important according to the neoclassical viewpoint?
- encouraging long-term growth
- stimulating potential GDP
- increasing aggregate demand to fight unemployment
A: increasing aggregate demand to fight unemployment

Q: Say’s Law:
- is widely held to be more accurate in the short run rather than the long term.
- is a central belief of Keynesian economists.
- states supply creates its own demand.
A: states supply creates its own demand.

Q: Say’s Law:
- states demand creates its own supply.
- is a central belief of Keynesian economists.
- is widely held to be more accurate in the long run rather than the short term.
A: is widely held to be more accurate in the long run rather than the short term.

Q: The classic quote from the movie Field of Dreams, “If you build (produce) it they will come (purchase),” can be used to describe ________.
- Keynesian economic policy
- the short-run
- Say’s Law
A: Say’s Law

Q: If you hear someone say, “If you build (produce) it they will come (purchase)” you know it is a good way to describe ________.
- Keynesian economic policy
- short-run economics
- Say’s Law
A: Say’s Law

Q: Which of the following statements would be inconsistent with Say’s law?
- A given value of supply must create an equivalent value of demand in the economy.
- The economy has flexible prices and wages.
- The best way to foster an economy is through government stimulus spending.
A: The best way to foster an economy is through government stimulus spending.

Q: Identify the following statement consistent with Say’s law?
- The best way to foster an economy is through government stimulus spending.
- The economy has set wages and prices.
- In the economy a supply value must create an equivalent demand value.
A: In the economy a supply value must create an equivalent demand value.

Q: Which of the following is an example of Say’s law?
- The economy of the country of Wakanda has set fixed prices and wages for both the short and long term.
- During the 2008-10 many people hoarded money instead of purchasing goods..
- The automotive industry, in order to create more output, need to focus on increasing production rather than demand.
A: The automotive industry, in order to create more output, need to focus on increasing production rather than demand.

Q: Say’s Law is displayed in which of the following examples?
- The economy of the country of Cuba has set fixed prices and wages for both the short and long term.
- During the 1970s many people hoarded money instead of purchasing goods and services.
- The clothing industry, in order to create more output, needs to focus on increasing production rather than demand.
A: The clothing industry, in order to create more output, needs to focus on increasing production rather than demand.

Q: Why do neoclassical economists tend to put relatively more emphasis on long-term growth than on fighting recession?
- Price and wage stickiness are reasonable in the short run.
- Government focuses more on recession and cyclical unemployment.
- The upward trend of potential GDP determines the rate of inflation.
- Because in the long run, recessions always end.
A: Because in the long run, recessions always end.

Q: Neoclassical economists have a tendency to put more emphasis on long-term growth than on fighting recession. Why is this the case?
- Wage stickiness and price are reasonable in the short run.
- Government focuses more on cyclical unemployment and recessions.
- The rate of inflation is determined by the upward trend of potential GDP.
- Because over the long run, recessions end.
A: Because over the long run, recessions end.

Q: Which of the following schools of thought believe that the economy is self-regulating and always at full employment?
- Keynesian
- activist
- neoclassical
A: neoclassical

Q: The ________ perspective tends to view inflation as a cost that offers no offsetting gains in terms of lower unemployment.
- Keynesian
- flexible wage and price
- neoclassical
A: neoclassical

Q: If a country experienced a natural disaster which wiped out a quarter of its capital stock, what would happen in the long run to its potential GDP?
- It would at first fall dramatically and remain below its pre-disaster level indefinitely.
- The capital stock would remain unaffected and continue on as usual.
- It would fall in the short-term and then rise back to pre-disaster levels in the long-term.
A: It would fall in the short-term and then rise back to pre-disaster levels in the long-term.

Q: The country of South Wales experienced a tsunami which wiped out half of its capital stock. What will happen, according to neoclassical perspective, to the country’s potential GDP?
- It would at first fall dramatically and remain below its pre-tsunami level indefinitely.
- The capital stock would remain unaffected and continue on as usual.
- It would fall in the short-term and then rise back to pre-tsunami levels in the long-term.
A: It would fall in the short-term and then rise back to pre-tsunami levels in the long-term.

Q: The fictional country of Zambezi’s economy is operating at its potential GDP and is looking to expand its output levels. What would increase Zambezi’s output according to neoclassical thinking?
- Zambezi adds more capital.
- Zambezi adds more laborers.
- Zambezi has technological breakthroughs or improvements.
A: Zambezi has technological breakthroughs or improvements.

Q: If the country of Switzerland has its economy operating at its potential GDP, but plans to expand its output levels, according to neoclassical thinking, what would increase the country’s outputs?
- Adding more capital.
- Adding more laborers.
- Technological improvements
A: Technological improvements

Q: Neoclassical economists argue that
- the long run aggregate supply curve is below the level of potential GDP.
- the long run aggregate supply curve moves gradually to the left as potential GDP grows.
- the long run aggregate supply curve is vertical.
A: the long run aggregate supply curve is vertical.

Q: The argument of neoclassical economists is that
- the long run aggregate supply curve is horizontal.
- the long run aggregate supply curve moves gradually to the left as potential GDP grows.
- the long run aggregate supply curve is at the level of potential GDP.
A: the long run aggregate supply curve is at the level of potential GDP.

Q: A rightwards shift of the AD curve along the Neoclassical portion of the aggregate supply curve will result in
- no effect on the price level.
- a decrease in the price level.
- an increase in the price level.
A: an increase in the price level.

Q: Considering the Neoclassical aggregate supply curve. If there is a rightwards shift of the AD curve along this AS curve, the result will be that
- price level remains the same.
- a price level decrease.
- a price level increase.
A: a price level increase.

Q: A vertical AS curve means that in the long run, the level of aggregate supply (or potential GDP) will determine the real GDP of the economy, regardless of the level of:
- cyclical unemployment.
- real unemployment.
- aggregate demand.
A: aggregate demand.

Q: If aggregate supply is vertical, then which of the following statements must be true of the long-run?
- Aggregate demand does not cause changes in the price level.
- Inflation will accompany any rise in output.
- Aggregate demand does not affect the quantity of output.
A: Aggregate demand does not affect the quantity of output.

Q: Aggregate demand is more likely than aggregate supply to ________ in the short run.
- remain unchanged
- increase slightly
- shift substantially
A: shift substantially

Q: In the short run, aggregate demand is more likely than aggregate supply to
- remain unchanged.
- slightly increase.
- substantially shift.
A: substantially shift.

Q: The vertical, long-run aggregate supply curve indicates that the long-run level of economic output is dependent upon ________.
- the price level
- government subsidies
- the stock of productive factors
A: the stock of productive factors

Q: The long-run economic level of output, according to the vertical, long-run aggregate supply curve, depends on ________.
- the price level
- an increase in aggregate demand
- technology
A: technology

Q: In the neoclassical view of the economy, expansionary fiscal policy cannot work to raise equilibrium output because
- it will raise unemployment.
- it will disincentivize production.
- flexible prices will eventually choke off any increase in aggregate demand.
A: flexible prices will eventually choke off any increase in aggregate demand.

Q: If a government expands its fiscal policy to raise equilibrium output, what will happen in the long term, according to the neoclassical view of the economy?
- It will not work because it will raise the level of unemployment.
- It will not work because it will disincentivize production.
- It will not work because the flexible prices will eventually choke off any increase in aggregate demand.
A: It will not work because the flexible prices will eventually choke off any increase in aggregate demand.

Q: If the aggregate demand in a macroeconomy increases, according to neoclassical theory, what happens to prices over the long term?
- Prices remain consistent with historic prices and are inflexible.
- Prices are sticky and do not shift quickly either in the short or the long term.
- Prices will be flexible and adjust back to equilibrium in the aggregate supply curve or potential GDP.
A: Prices will be flexible and adjust back to equilibrium in the aggregate supply curve or potential GDP.

Q: If aggregate demand decreases, neoclassical theory suggests that in the long-term, prices
- remain consistent with historic prices and are inflexible.
- are sticky and do not shift quickly either in the short or the long term.
- will be flexible and adjust back to equilibrium along the aggregate supply curve.
A: will be flexible and adjust back to equilibrium along the aggregate supply curve.

Q: Last year Canada’s economy had a surge in exports and increased demand for additional economic outputs. Because of the great demand, industry’s now have a labor shortage and wages have begun to rise. If you are looking at Canada’s macroeconomy through the lense of a neoclassical economic understanding, what you will expect to see over time?
- Wages will rise rapidly and with the increase in demand the outputs will operate above potential GDP for both the short and long term for the economy.
- Wages will be sticky and rise slowly, prices will rise rapidly and the vertical AS curve (potential GDP) will not shift to the right over the long-term.
- Wages and prices will rise in the short-term, and over the long-term they will be flexible and move to a higher equilibrium price along the vertical AS curve (potential GDP).
A: Wages and prices will rise in the short-term, and over the long-term they will be flexible and move to a higher equilibrium price along the vertical AS curve (potential GDP).

Q: This year Mexico’s economy had a decrease in exports and increased demand imports. Because of the great decrease in demand for Mexican products and services, industry’s now have a labor glut and wages have begun to drop. What would you expect to see over time in Mexico’s macroeconomy from a Neoclassical economic understanding?
- Wages will fall rapidly and with the decrease in demand for outputs it will operate below potential GDP for both the short and long term for the economy.
- Wages will be sticky and fall slowly, prices will fall rapidly and the vertical AS curve (potential GDP) will not shift to the left over the long-term.
- Wages and prices will fall in the short-term, and over the long-term they will be flexible and move back to a lower equilibrium price along the vertical AS curve (potential GDP).
A: Wages and prices will fall in the short-term, and over the long-term they will be flexible and move back to a lower equilibrium price along the vertical AS curve (potential GDP).

Q: A vertical AS curve means that changes in GDP will be caused by
- cyclical unemployment.
- changes in potential output.
- changes in aggregate demand.
A: changes in aggregate demand.

Q: According to neoclassical theory, changes in GDP, or the vertical AS curve, will be caused by
- cyclical unemployment.
- potential output changes.
- aggregate demand changes.
A: aggregate demand changes.

Q: In the neoclassical model, economic growth through technological change over time shifts potential GDP and the ________ gradually to the right.
- vertical AD curve
- vertical Phillips curve
- vertical AS curve
A: vertical AS curve

Q: In the neoclassical model, the AS curve shifts to the right over time as ________ and potential GDP expands.
- the macroeconomy adjusts back to real GDP
- the level of real output drops
- productivity increases
A: productivity increases

Q: Over the long run, a surge in aggregate demand from a neoclassical perspective will most likely result in
- a rise in level of output.
- downward pressure on the price level.
- an increase in price level.
A: an increase in price level.

Q: Which of the following factors are excluded from shifting the aggregate demand curve?
- a cut in personal income tax rates
- high consumer confidence
- increased defense spending
- an increase in the price level
A: an increase in the price level

Q: 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 says the rise in aggregate demand will ________ while the neoclassical model predicts ________ in the long-run.
- cause government to lower taxes; higher taxes
- cause exports to drop; that exports will drop
- cause lower unemployment; full employment
A: cause lower unemployment; full employment

Q: If a macroeconomy experiences a fall in business confidence which has led to less investment in the economy and lower levels of output. Keynesian analysis in the short-run, predicts that the fall in aggregate demand will ________, while the Neoclassical view says ________ in the long-run.
- cause government to raise taxes; lower taxes
- cause exports to increase; that exports will drop
- cause higher unemployment; there will be full employment
A: cause higher unemployment; there will be full employment

Q: The theory of rational expectations indicates that agents’ expectations change ________ and therefore ________ the effectiveness of monetary or fiscal policy.
- slowly; increase
- are based on historical information; always improve
- immediately; preclude
A: immediately; preclude

Q: If you are explaining the theory of rational expectations to a friend, you would say that the change in an agents’ expectations is ________ and therefore ________ the effectiveness of monetary or fiscal policy.
- slow; increases
- based on historic information; always improves
- immediate; precludes
A: immediate; precludes

Q: In adaptive expectations, agents ________ to make their forecasts of economic conditions.
- use both current and past information
- ignore current information and consider only the past
- ignore the past and consider only current information
A: ignore the past and consider only current information

Q: In describing what adaptive expectations means to a friend, you explain that in order to make their economic condition forecasts, agents ________.
- use both past and current information
- consider only the past and ignore current information
- consider only current information and ignore the past
A: consider only current information and ignore the past

Q: From a neoclassical perspective, which of the following would most likely be viewed as an element that undermines long-run productivity growth in the economy?
- government stimulus spending
- cyclical unemployment
- tax cuts on business capital investment
A: tax cuts on business capital investment

Q: Which of the following scenarios would most likely be viewed from a neoclassical perspective as an undermining element of the long-run productivity growth in an economy?
- stimulus spending by the government
- unemployment that is cyclical
- business capital investment tax cuts
A: business capital investment tax cuts

Q: The owner of a national software company has been watching current economic information for the past two quarters and a rapid rise in demand for its software suites. Last month 30 new software engineers were hired to meet the demand. Even though these new hires will finish their project work in a few months, the owner plans to retain them in anticipation of future demand. Why is the owner making these type of decisions for the long-run?
- The owner is using adaptive expectation reasoning to hire more engineers and be ready for future demands of a long-term economic shift.
- The owner is using aggregate expectation reasoning to hire more engineers to quickly be ready for short-term future demands.
- The owner is using rational expectation reasoning to hire more engineers to quickly be ready now for future demands of a long-term economic shift.
A: The owner is using rational expectation reasoning to hire more engineers to quickly be ready now for future demands of a long-term economic shift.

Q: The owner of a national construction company has been watching current economic changes. They have gathered historical data from their company’s business experiences through up and down markets and have decided on a plan to follow as demand changes over the next year, three years and five year plan, with alternative options based on past data. Why is the owner making these type of decisions for the long-run?
- The owner is using rational expectation reasoning to change important aspects of the company to be ready for future demands of a long-term economic shift.
- The owner is using aggregate expectation reasoning to to change important aspects of the company to be ready for short-term future demands.
- The owner is using adaptive expectation reasoning to change important aspects of the company to be ready for future demands as the long-term economy shifts.
A: The owner is using adaptive expectation reasoning to change important aspects of the company to be ready for future demands as the long-term economy shifts.

Q: If a neoclassical model shows increasing wages in the economy in the short run, what else will likely occur?
- A change in government policy to decrease in aggregate demand.
- A rightward shift of the short-run aggregate supply curve.
- An inflationary increase in price level.
A: An inflationary increase in price level.

Q: What else will probably happen if a neoclassical model shows increasing wages in the economy in the short run?
- A change in government policy to decrease in aggregate demand.
- A rightward shift of the short-run aggregate supply curve.
- A leftward shift of the short-run aggregate supply curve.
A: A leftward shift of the short-run aggregate supply curve.

Q: Of the following government policies, which would be considered a neoclassical response to an economic recession?
- an increase in government spending
- adjusting the minimum wage higher
- dissolving labor unions
A: dissolving labor unions

Q: Which of the following government policies is a neoclassical response to an economic recession?
- Increase in government spending.
- Adjust the minimum wage higher.
- Terminating labor unions.
A: Terminating labor unions.

Q: If you were to explain to a friend how the macroeconomy would be influenced by neoclassical policies, which of the following statements would be the correct explanation?
- The macroeconomy has inflexible prices and wages meaning it is not self correcting and in need of governmental intervention for correction.
- The macroeconomy has flexible prices and wages it is self correcting but still needs governmental regulation of wage policies, price ceilings and floors.
- The macroeconomy has flexible prices and wages and it is self correcting and not in need of governmental intervention for correction.
A: The macroeconomy has flexible prices and wages and it is self correcting and not in need of governmental intervention for correction.

Q: Your friend asks what you are studying and you tell them neoclassical policies in a macroeconomy. Which of the following statements would explain neoclassical economic policy the best to your friend?
- Neoclassical policies would call for government intervention during a recession.
- Neoclassical policies would call for limited government intervention during a recession.
- Neoclassical policies would call for no government intervention during a recession.
A: Neoclassical policies would call for no government intervention during a recession.

Q: The country of Botalava hired Gustav to assist with government policies regarding the macroeconomy. Gustav is a neoclassical economist and makes all decisions based on that economic philosophy. What policies will Gustavo tell the government to enact in order to foster a health economy?
- Policies should be set up to regulate wages and unions, and set price floors and ceilings for specific fundamental goods.
- Policies should be set up to increase production output through regulating sales of resources and strictly monitor exports and imports.
- Policies should be set up to keep inflation low and maintain low tax levels over the long run.
A: Policies should be set up to keep inflation low and maintain low tax levels over the long run.

Q: The country of Bratislaka hired Gudurn to assist with government policies regarding the macroeconomy. Gudrun is a neoclassical economist and makes all decisions based on those economic philosophies. What policies will Gudrun tell the government to enact in order to foster a health economy?
- The government should set up and regulate wages and unions, and set price floors and ceilings for specific fundamental goods.
- The government should increase production output through regulating sales of resources and strictly monitor exports and imports.
- The government should keep inflation low and maintain low tax levels over the long run.
A: The government should keep inflation low and maintain low tax levels over the long run.

Q: Keynes believed that economies are ________ driven in the ________ .
- demand; long-run
- supply; long-run.
- demand; short-run.
A: demand; short-run.

Q: According to economic laws explained by Keynes, it is believed that economies in the ________ and ________ driven.
- long-run; demand
- long-run; supply
- short-run; demand
A: short-run; demand

Q: Keynes understood that in the short-run wages and prices are ________ and therefore encourage the use of ________ to return an economy to equilibrium.
- rigid; monetary policy
- flexible; monetary policy
- rigid; fiscal policy.
A: rigid; fiscal policy.

Q: Keynes encourages the use of ________ to return an economy to equilibrium because of the perspective that in the short-run wages and prices are ________.
- monetary policy; rigid
- monetary policy; flexible
- fiscal policy; rigid
A: fiscal policy; rigid

Q: Which of the following statements is aligned with Say’s Law during a recession?
- One of the most effective ways to stimulate an economy is to levy larger corporate taxes.
- The most effective way to stimulate an economy is through strategic monopolies.
- An effective stimulant for a recessionary economy is providing subsidies for investors.
A: An effective stimulant for a recessionary economy is providing subsidies for investors.

Q: The statement, “An effective stimulant for a recessionary economy is providing subsidies for investors“ is aligned best with:
- Keynes Law.
- Supply and Demand Law.
- Say’s Law.
A: Say’s Law.

Q: When comparing Keynes and Neoclassical economics when it comes to an economy, what is the one area in which these two economic perspectives agree?
- Prices and wages are sticky.
- Aggregate demand is a useful tool for ending a recession.
- Aggregate demand is a useful tool for controlling inflation.
A: Aggregate demand is a useful tool for controlling inflation.

Q: What is the one area in which both Neoclassical and Keynes economic perspectives agree when it comes to the macroeconomy?
- Prices and wages are flexible.
- Economic output is primarily determined by aggregate demand.
- Aggregate demand is a useful tool for controlling inflation.
A: Aggregate demand is a useful tool for controlling inflation.

Q: What is the best explanation for the slope of the neoclassical zone of the aggregate supply curve?
- A small increase in aggregate demand when the economy is operating below its potential output will not have much effect on the price level.
- An increase in aggregate demand causes both real output and the price level to increase.
- 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.
A: 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.

Q: A small increase in output that causes a proportionately large increase in the price level indicates that the economy is operating ________.
- on the Keynesian zone of the aggregate supply curve.
- between the Keynesian and neoclassical zones of the aggregate supply curve.
- on the neoclassical zone of the aggregate supply curve.
A: on the neoclassical zone of the aggregate supply curve.

Q: The neoclassical model focuses more on long-term fluctuations caused by business cycles and also ________.
- short-term fluctuations caused by technological change and labor force growth
- immediate determinants like changes in hiring and firing.
- long-run determinants of output and employment
A: long-run determinants of output and employment

Q: The neoclassical model focuses more on long-run determinants of output and employment as well as
- immediate changes in the marketplace
- short-term fluctuations caused by technological change and labor force growth
- long term fluctuations caused by business cycles
A: long term fluctuations caused by business cycles

Q: Say’s Law states that supply creates its own demand. In the neoclassical zone on the graph above, supply is at its potential GDP, at full capacity. When aggregate supplies have reached their full potential output, what happens if demand shifts to the right?
- The aggregate supply outputs increase and LRAS shifts to the right.
- The aggregate demand prices decrease as AD shifts to the right.
- The aggregate demand prices increase as AD shifts to the right.
A: The aggregate demand prices increase as AD shifts to the right.

Q: If supply creates its own demand as Say’s Law states, then in the neoclassical zone on the graph above when supply is at its potential GDP, what happens if demand shifts to the right?
- The aggregate supply outputs increase and LRAS shifts to the right.
- The aggregate demand prices decrease as AD shifts to the right.
- The aggregate demand prices increase as AD shifts to the right.
A: The aggregate demand prices increase as AD shifts to the right.

Q: Consider the neoclassical zone in the graph above. Which of the following is a true statement about Say’s Law in the neoclassical zone?
- Movement of the AD curve to the right or to the left shifts the LRAS curve.
- Because equilibrium is close to or at potential GDP, unemployment is affected by shifts in the AD curve.
- Shifts of the AD curve have little to no effect on supply output because the LRAS at full output is creating demand.
A: Shifts of the AD curve have little to no effect on supply output because the LRAS at full output is creating demand.

Q: Which of the following is a true statement about Say’s Law in the neoclassical zone pictured in the above graph?
- The LRAS curve moves depending on whether the AD curve moves to the right or left.
- Unemployment is affected by shifts in the AD curve because the equilibrium point is close to or at potential GDP.
- Because the LRAS is at full output it is creating demand and shifts of the AD curve have little to no effect on supply output.
A: Because the LRAS is at full output it is creating demand and shifts of the AD curve have little to no effect on supply output.

Q: What is the best explanation for the slope of the Keynesian zone of the aggregate supply curve?
- An increase in aggregate demand causes both real output and the price level to increase.
- 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.
- An increase in aggregate demand when the economy is operating below potential output causes real output to grow, with little or no effect on the price level.
A: An increase in aggregate demand when the economy is operating below potential output causes real output to grow, with little or no effect on the price level.

Q: The best explanation for the slope of the Keynesian zone of the aggregate supply curve is that an increase in aggregate demand
- causes both real output and the price level to increase.
- when the economy is operating at potential output causes the price level to rise, with little or no effect on real output.
- when the economy is operating below potential output causes real output to grow, with little or no effect on the price level.
A: when the economy is operating below potential output causes real output to grow, with little or no effect on the price level.

Q: The Keynesian model focuses more on short-term fluctuations caused by business cycles and the neoclassical model focuses more on ________.
- short-term fluctuations caused by technological change and labor force growth
- immediate determinants like changes in hiring and firing
- long-run determinants of output and employment
A: long-run determinants of output and employment

Q: The Keynesian model focuses more on ________ and the neoclassical model focuses more on long-run determinants of output and employment.
- immediate changes in the marketplace
- short-term fluctuations caused by technological change and labor force growth
- short-term fluctuations caused by business cycles
A: short-term fluctuations caused by business cycles

Q: What part of the graph above would you say an economy is operating in if the economy is in a recession, operating below its potential GDP, and where cyclical unemployment is high?
- Neoclassical zone
- Intermediate zone
- Keynesian zone
A: Keynesian zone

Q: If you are looking at an economy that is operating below its potential GDP, where cyclical unemployment is high, and it is in a recession, then which zone represents that in the graph above?
- Neoclassical zone
- Intermediate zone
- Keynesian zone
A: Keynesian zone

Q: Keynes' Law says that demand creates its own supply. In the Keynesian zone of the short-run aggregate supply curve, how is this law supported?
- Aggregate demand either increasing or decreasing has a large effect on prices and little effect on aggregate supply because the economy is close to full capacity.
- When aggregate demand decreases, prices remain relatively static and outputs remain unchanged because the economy lacks excess capacity.
- Increasing aggregate demand changes prices relatively little, but does effectively increase aggregate outputs because of the excess capacity in the economy.
A: Increasing aggregate demand changes prices relatively little, but does effectively increase aggregate outputs because of the excess capacity in the economy.

Q: In the Keynesian zone of the aggregate supply curve, how is Keynes’ law, where demand creates its own supply, illustrated?
- Because the economy is closer to full output, aggregate demand either increasing or decreasing has a large effect on prices and little effect on aggregate supply.
- Prices remain relatively static and outputs remain unchanged when aggregate demand decreases because the economy lacks excess capacity.
- Prices change relatively little with an increasing aggregate demand, but that changing demand does effectively increase aggregate outputs because of the excess capacity in the economy.
A: Prices change relatively little with an increasing aggregate demand, but that changing demand does effectively increase aggregate outputs because of the excess capacity in the economy.

Q: A key distinction between the Keynesian and neoclassical economists is that Keynesians believe the economy exhibits a ________ aggregate supply curve and neoclassicals believe it is ________.
- vertical; flat
- upward-sloping; downward-sloping
- flat; vertical
A: flat; vertical

Q: The Keynesian zone of the aggregate supply curve is ________ while the neoclassical portion is ________.
- vertical; flat
- upward-sloping; downward-sloping
- horizontal; vertical
A: horizontal; vertical

Q: What is the shape of the intermediate zone of the AD-AS curve?
- downward-sloping
- horizontal
- upward-sloping
A: upward-sloping

Q: The intermediate zone of the AD-AS curve is ________.
- downward-sloping
- horizontal
- upward-sloping
A: upward-sloping

Q: How does the intermediate zone of the AD-AS curve follow Say’s law when AD shifts to the right?
- SRAS is flatter and creates more supply by decreasing prices and output level.
- SRAS creates more demand by decreasing prices and output level.
- SRAS moves closer to potential GDP and increases price level.
A: SRAS moves closer to potential GDP and increases price level.

Q: When considering the intermediate zone of the AD-AS curve, if the AD curve moves to the right how does it follow Keynes’ law?
- SRAS is flatter and creates more supply by decreasing prices and output level.
- SRAS is more vertical, which is closer to potential GDP where mostly price is affected.
- AD shifted to the right influences supply creating increased output levels.
A: AD shifted to the right influences supply creating increased output levels.

Q: In the intermediate zone of an AD-AS graph with a AD curve that has shifted to the left, how is it following Keynes’ law?
- The AS curve slopes up more bringing it closer to potential GDP and more demand.
- The AS curve decreases output levels and increases demand.
- As AD moves left to a flatter AS curve it influences supply and decreases output levels.
A: As AD moves left to a flatter AS curve it influences supply and decreases output levels.

Q: Why does the AD curve moving left follow Say’s law when in the intermediate zone of the AD-AS graph?
- As AD moves left to a flatter AS curve it influences supply and decreases output levels.
- The AS curve is sloping up and closer to potential GDP.
- Higher unemployment levels (excess supply) and lower prices should cause demand to increase.
A: Higher unemployment levels (excess supply) and lower prices should cause demand to increase.

Q: Which model is known to do a good job explaining recessions and the rise and fall of cyclical employment?
- neoclassical
- supply-side
- Keynesian
A: Keynesian

Q: Recessions and the fluctuations in cyclical employment are best explained by the ________ model.
- neoclassical
- supply-side
- Keynesian
A: Keynesian

Q: Which model is known to do a good job explaining long-term economic growth?
- Keynesian
- supply-side
- neoclassical
A: neoclassical

Q: Long-term economic growth is best explained by the ________ model.
- Keynesian
- supply-side
- neoclassical
A: neoclassical

Q: Economists who hold to Keynesian views are most aptly described as ________ .
- supply-siders
- believers in perfect competition
- aggregate demand policy interventionists
A: aggregate demand policy interventionists

Q: Economists who hold to Neoclassical views are most aptly described as ________ .
- aggregate demand policy interventionists
- supply-siders
- believers in perfect competition
A: believers in perfect competition

Q: A weakness of the Keynesian economic view is that it:
- focuses on the long-term factors for economic growth and not the short-term causes of economic growth such as why unemployment fluctuates up and down over a few years.
- can overlook the short-term causes of economic growth or decline when the economy is stuck in a long-lasting recession.
- can overlook the long-term causes of economic growth like the existing natural rate of unemployment even when the economy is at potential GDP.
A: can overlook the long-term causes of economic growth like the existing natural rate of unemployment even when the economy is at potential GDP.

Q: A weakness of the neoclassical economic view is that it:
- can overlook the long-term causes of economic growth like the existing natural rate of unemployment even when the economy is at potential GDP.
- can overlook the efficiency of the market economy in self-correcting in the long-run.
- focuses on the long-term factors for economic growth and not the short-term causes of economic growth such as why unemployment fluctuates up and down over a few years.
A: focuses on the long-term factors for economic growth and not the short-term causes of economic growth such as why unemployment fluctuates up and down over a few years.