Chapter 11
Multiple Choice Questions
1. Say’s law
A. was a basic pillar of classical economics.
B. was a basic pillar of Keynesian economics.
C. was formulated during the Great Depression.
D. proves that we can never have full employment.
2. Which question did John Maynard Keynes pose for the classical economists?
A. What if their policies led to inflation?
B. What if savings and investment were not equal?
C. What if government intervention did not cure a recession?
D. John Maynard Keynes posed none of these questions
3. At equilibrium GDP
A. Savings = investment, but aggregate demand does not equal aggregate supply.
B. Savings = investment and aggregate demand = aggregate supply.
C. Savings does not equal investment and aggregate demand does not equal aggregate supply.
D. Savings does not equal investment, but aggregate demand = aggregate supply.
4. Laissez-faire economics was advocated by
A. both Keynes and the classicals.
B. neither Keynes nor the classicals.
C. the classicals, but not by Keynes.
D. Keynes, but not by the classicals.
5. When the average price level in the United States, relative to the average price levels in
other countries, rises, this tends to
A. raise imports and exports.
B. lower imports and exports.
C. raise imports and lower exports.
D. lower imports and raise exports.
6. According to the classicals, our economy can produce beyond the full employment output
A. only in the short run.
B. only in the long run.
C. in both the short run and the long run.
D. in neither the short run nor the long run.
11-2
7. Keynes and the classicals used _____ aggregate demand and supply apparatuses and came
to _____ conclusions.
A. the same; the same
B. different; different
C. the same; different
D. different; the same
8. John Maynard Keynes
A. agreed with classical writers that strong automatic pressures drive market economies to full
employment.
B. focused on attaining the long-run macroeconomic goal of high, but stable economic
growth.
C. argued that a market economy might become stuck in a short-run equilibrium in which
substantial capital and labor lay idle.
D. argued that short-run equilibrium occurs only at full employment.
9. The notion that everything the economy produces is purchased
A. sums up Say’s law.
B. can be restated as “demand creates its own supply.”
C. refers to the real balance effect.
D. was a critical assumption Keynes made in explaining the worldwide depression of the
1930s.
10. If the economy is in the vertical portion of the AS curve, what will be the effect of an
increase in the price level on output produced?
A. Output will increase at a very rapid rate
B. Output will not change
C. Output will only slightly increase
D. Output change cannot be predicted from information given
11. The wealth or real balances effect indicates that
A. An increase in the price level will increase the demand for money, increase interest rates,
and reduce consumption and investment spending
B. A lower price level will decrease the real value of many financial assets and therefore
cause a decline in spending
C. A higher price level will increase the real value of many financial assets and therefore
cause a decline in spending
D. A higher price level will decrease the real value of many financial assets and therefore
cause a decline in spending
12. Classical economists and monetarists perceive
A. investors’ expectations about returns on investment as unstable.
B. large investment swings as responses to small changes in interest rates.
C. that the best way to cure unemployment is to start a war.
D. that the proper cure for unemployment is active fiscal policy.
11-3
13. Classical economists believed that
A. if saving exceeded investment, prices and interest rates would rise as business accumulated
unwanted inventories.
B. flexible prices and wages could not restore an economy to full employment if the interest
rate were rigid.
C. flexible interest rates, wages, and prices would assure full employment.
D. voluntary unemployment reflected economic inefficiency.
E. all unemployment was involuntary.
14. The curve showing the amount of real output, or real GDP, that will be made available by
sellers at various price levels is called the
A. aggregate demand curve.
B. real gross domestic investment curve.
C. aggregate supply curve.
D. Keynesian cross.
E. aggregate individual demand curve.
15. Which of the following is incorrect?
A. As the American average price level rises, American goods become relatively more
expensive so that our exports fall and our imports rise.
B. As the average price level falls, the interest rate declines, and interest-rate sensitive
spending increases.
C. When the average price level increases, real balances increase, businesses and households
find themselves wealthier and therefore increase their spending.
D. An increase in aggregate supply tends to increase real domestic output and reduce the
average price level.
16. The aggregate demand curve shows a(n)
A. positive relationship between prices and quantities.
B. inverse relationship between the price level and the aggregate quantity demanded.
C. independent relationship between the price level and the aggregate quantity demanded.
D. inverse relationship between the product price and the quantity of a good demanded.
17. The Keynesian point of view suggests that
A. supply creates its own demand.
B. demand creates its own supply.
C. the market is always at equilibrium.
D. full employment is the natural result of market forces.
E. wage and price controls can halt deflationary pressures.
18. Which of the following will cause a change in aggregate demand?
A. A change in consumer demand
B. A change in the demand for investment goods
C. A change in government spending
D. All of the choices will cause a change in aggregate demand.
11-4
19. If the aggregate supply curve is upward sloping, an increase in aggregate demand will
A. increase real GDP at a constant level of prices.
B. reduce real GDP but increase the price level.
C. increase real GDP but reduce the price level.
D. reduce both real GDP and the price level.
E. increase both real GDP and the price level.
20. Real money balances
A. refer to the amounts of nominal money that individuals hold.
B. are computed by deflating nominal money assets by the average price level.
C. refer to the amounts of American money that an individual holds relative to gold or foreign
currencies.
D. are measured by currency holdings rather than holdings in checking accounts.
E. are identical to nominal money balances in the long run.
21. The classical macroeconomic model argues that the economy has built-in forces that
automatically eliminate unemployment and quickly move the economy to its full employment
level of real GDP. Which assumption is critical to this argument?
A. Rigid wages and prices
B. Flexible wages and prices
C. Natural rate of unemployment
D. Profit motive
E. None of the choices are correct.
22. The long-run aggregate supply curve, according to the classical model,
A. is vertical at full employment GDP.
B. slopes gently upward.
C. is horizontal at the equilibrium price level.
D. may be downward sloping.
E. slopes steeply upward.
11-5
23. Curve XY represents ____________.
A. short-run aggregate demand
B. long-run aggregate demand
C. short-run aggregate supply
D. long-run aggregate supply
24. Curve YZ represents ____________.
A. short-run aggregate demand
B. long-run aggregate demand
C. short-run aggregate supply
D. long-run aggregate supply
25. Aggregate demand will decrease when there are
A. decreases in government spending.
B. increases in consumer and business confidence.
C. increases in inflationary expectations.
D. decreases in the price level.
E. declines in the demand for money.
26. The foreign purchases effect suggests that a decrease in the American price level relative
to those in other countries will
A. shift the aggregate demand curve leftward.
B. shift the aggregate supply curve leftward.
C. decrease American exports and increase American imports.
D. increase American exports and decrease American imports.
11-6
27. If aggregate demand shifts from AD1 to AD2,
A. both output and the price level will rise.
B. output will rise and the price level will fall.
C. output will rise and the price level will remain the same.
D. both output and the price level will fall.
E. output will fall and the price level will rise.
28. If aggregate demand shifts from AD2 to AD4,
A. both output and the price level will rise.
B. output will rise and the price level will fall.
C. output will rise and the price level will remain the same.
D. both output and the price level will fall.
E. output will fall and the price level will rise.
29. If aggregate demand shifts from AD4 to AD5,
A. output will rise and the price level will fall.
B. output will fall and the price level will rise.
C. neither output nor the price level will change.
D. the price level will rise and output will remain unchanged.
E. output will rise and the price level will remain unchanged.
30. A self-regulating market
A. eliminates shortages or surpluses through price changes.
B. can eliminate shortages quickly, but eliminates surpluses slowly.
C. renders Say’s law invalid.
D. occurs only in labor markets.
E. occurs only in credit markets.
31. Suppose the nation is in a recession. As a result, the current macroeconomic equilibrium
occurs along the flat portion of the aggregate supply curve. A moderate increase in aggregate
demand is likely to
A. increase the equilibrium price level with little effect on equilibrium real GDP.
B. increase equilibrium real GDP with little effect on the price level.
C. cause the price level to fall.
D. decrease employment.
11-7
32. If the aggregate demand curve shifts to the right,
A. the economy is in equilibrium.
B. people are willing to buy less real output at every price level.
C. people are willing to buy more real output at every price level.
D. people are willing to buy more real output at a lower price level.
33. According to classical macroeconomic theory, the flexible interest rate
A. is the incentive that encourages businesses to obtain credit.
B. will tend to fall when the quantity of credit demanded exceeds the quantity of credit
supplied.
C. will tend to rise when the supply of credit exceeds the demand for credit.
D. ensures that saving cannot exceed investment spending for extended periods of time.
34. Adherents of Say’s law maintained that
A. demand created its own supply.
B. people work in order to earn income to spend on consumption.
C. people work in order to earn income to save.
D. demand is unaffected by supply.
35. According to Keynes, the primary cause of large-scale unemployment is
A. high prices.
B. low prices.
C. high exports.
D. low exports.
E. inadequate aggregate demand.
36. When we draw an aggregate demand curve, what do we put on the vertical axis?
A. The total quantity of goods and services demanded
B. The full employment output
C. The quantity of money
D. The price level
37. Which of the following statements best reflects Keynes’ view of the aggregate supply
curve?
A. It tends to be vertical, because the economy naturally tends toward equilibrium positions of
full employment.
B. It tends to be upward sloping (but not vertical), because as we try to produce more output
out of our given resources, some labor has to work overtime at higher pay, driving up costs
and prices.
C. It tends to be horizontal during periods when substantial amounts of resources are
unemployed.
D. It tends to slope downward and to the right reflecting people’s natural tendency to postpone
purchases when they lose their jobs.
E. None of the choices are true of Keynes’ view of the aggregate supply curve.
11-8
38. The real wealth effect provides a partial explanation for why the aggregate demand curve
slopes downward. Which of the following statements best explains the real wealth effect?
A. At a lower price level domestically produced items are relatively less expensive than
foreign goods and therefore are in greater demand.
B. At a lower price level the real interest rate tends to be lower, and thus the quantity of
investment goods demanded is larger.
C. At a lower price level consumers will buy less because of a reduction in the real money
supply.
D. At a lower price level the purchasing power of accumulated savings is larger, and thus
consumers will purchase more goods.
39. If the rate of interest did not equate saving and investment and total output was greater
than total spending, the classical economist argued, competition would tend to force
A. product and resource prices down.
B. product prices up and resource prices down.
C. product prices up and resource prices up.
D. product prices down and resource prices up.
40. The major difference between the Keynesian model and the classical theory of
employment is that
A. the interest rate will not always equalize savings and investment.
B. not everything produced will necessarily be purchased.
C. saving and investing are done by different people for different reasons.
D. wages and prices are assumed to be flexible downwards.
41. According to Keynes, at equilibrium, aggregate demand will always equal which of the
following?
A. Aggregate supply
B. C + S
C. C + I
D. All of the choices are correct.
42. Assume the aggregate demand curve intersects the aggregate supply curve in its
intermediate range. A decrease in the aggregate supply curve will
A. increase the price level and decrease real GDP.
B. decrease the price level and increase real GDP.
C. increase both the price level and real GDP.
D. decrease both the price level and real GDP.
11-9
43. Who said our economy “seems capable of remaining in a chronic condition of subnormal
activity for a considerable period without any marked tendency either toward recovery or
toward complete collapse”?
A. David Ricardo
B. Jean Baptiste Say
C. Wassily Leontief
D. John Maynard Keynes
E. Sidney Greenstreet
44. The classical school
A. was the dominant school of economic thought after the Great Depression.
B. advocated laissez-faire.
C. was mainly concerned with aggregate demand.
D. believed that about half of the money saved would be invested.
45. Jean Baptiste Say believed in all of the following EXCEPT that
A. Supply creates its own demand.
B. People work so that they can save.
C. Everything produced in an economy is sold.
D. The normal state of economic affairs is full employment.
46. Each of the following is consistent with the classical theory EXCEPT
A. wages and prices are flexible.
B. the economy is always at full employment.
C. supply creates its own demand.
D. laissez-faire.
47. Which of the following is true?
A. Keynes asked the question: If supply creates its own demand, why are we in a worldwide
depression?
B. According to Keynes, if savings were greater than investment, interest rates would fall,
bringing the economy back to full employment.
C. Keynes believed that wages and prices were flexible.
D. Keynes believed the economy was basically stable.
48. The classical school
A. was the dominant school of economic thought until the Great Depression.
B. was the dominant school of economic thought after the Great Depression.
C. believed that the economy was basically unstable.
D. believed wages and prices were rigid downwards.
E. All of the choices are true of the classical school.
11-10
49. Keynes believed
A. increases in investment expenditures are due to lower interest rates.
B. increases in investment expenditures are due to high profit expectations.
C. increases in investment expenditures are due to excessive funds in the loanable funds
market.
D. since supply creates its own demand, increases in investment expenditures creates
additional supply and therefore more demand and earnings for the businesses.
50. What economic events enabled most countries to escape the Great Recession of 2007-
2009?
A. Interest rates fell because of excess savings.
B. Wage rates declined.
C. Fiscal policy was enacted using tax cuts and/or increases in government spending.
D. Prices declined.
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