1.The Keynesian analysis differs from classical analysis in its short-run analys
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Question
1.The Keynesian analysis differs from classical analysis in its short-run analysis of the economy.
True or False
2.In the simplest Keynesian model, planned investment is assumed to be
a.positively related to income
b.negatively related to income
c.constant
d.absent
3.Keynes recommended the use of government deficit spending to overcome widespread unemployment.
True or False
4.A lower price level causes
a.the entire aggregate expenditure to shift up
b.the entire aggregate demand curve to shift to the right
c.a movement along a given aggregate demand curve
d.both (a) and (c)
5.Aggregate expenditures fall as prices rise, because higher prices
a.reduce the value of household financial assets and hence reduce planned consumption
b.increase demand for imports and discourage exports
c. cause higher interests rates, which reduce the demand for investment
d. all of the above
6.If one city has a higher CPI than another city, the city with the higher CPI must have a higher cost of living.
True or Fasle
7.In the equation of exchange MV = PQ, V stands for
a.inventory turnover
b.total transactions in the economy
c.average rate of turnover of the money supply
d.variation in interest rates
8.Which of the following is not a function of money?
a.store of value
b.medium of exchange
c.standard of quality
d.standard of deferred payment
9.In a price index, the quantity of goods and services being measured between two periods
a.must be increased
b.must be held constant
c.must be decreased
d.should be increased or decreased
10.An increase in the money supply is more likely to be inflationary when
a.the economy is at less than full employment
b.the economy is at full employment
c.a surplus government budget exists
d.velocity is decreasing
Explanation / Answer
So, yes, the Keynesian framework differs from that of the Classical in the short run. Correct option is ‘True’.
2. In simple Keynesian model the investment depends upon two factors, the national income and the rate of interest. As the national income rises, the demand for the goods and services rises, so the need for investment and so the actual investment rises as well. Therefore, the investment expenditure is a positive function of the national income.
The correct option is option (a).
3. In Keynes’s view the unemployment arises because of the lack of effective demand in the economy. So, the problem of unemployment could be overcome by increasing either or any combination of the factors that made up the aggregate demand (that is, consumption, investment, government expenditure). But at the time of recession/depression, the consumption and investment expenditure is at a very low level and only the increase in the government expenditure could boost the aggregate demand up. That’s why in 1930s, at the time of great depression, Keynes recommended to use government deficit spending to cure unemployment.
The correct option is ‘True’.
4. We can look at the impact from both aggregate expenditure side and from the aggregate demand side. Firstly, we know that aggregate expenditure consists of 3 main factors, consumption, investment, and government expenditure. We get a macroeconomic equilibrium at a specific price level. Now, if the price falls, then certainly, the consumption expenditure rises. And we know that the investment expenditure depends upon the real interest rate, so as the price level drops, the real interest rate goes up, which induces the investment to go down; whereas the increase in consumption expenditure induces the national income to go up, which in turn induced the investment to increase as investment is positively related to income. So, in this case, we need to look at the comparative studies; but we could conclude that the aggregate expenditure increases as the price falls. So, the Aggregate Expenditure curve shifts up.
On the other hand, aggregate demand shows the relation between the aggregate price level and the real expenditure, so as the price level drop, by the law of demand we could say that the aggregate demand rises along the same curve.
So, the correct option is (d).
5. If we look at the vice-versa scenario of what we had discussed in question number 4, we could say that, as the price level rises, the real value of the national income falls and so the aggregate consumption reduces. And as the price rises, the demand for money becomes greater than the supply of money, which induces the interest rate to go up. So, as the interest rate go up, the investment falls as there is inverse relation between the two. Also, the rise in domestic price puts the home country at a disadvantaged position as compared to the foreign country as the foreign country’s goods then be cheaper than the domestic country. So, the rise in price level also induces the imports to increase and the export decreases.
So, the correct option will be option (d).
6. CPI or the Consumer price index shows the actual price level that the consumer has to pay to buy the goods and services. So, if a region has a higher CPI, the consumer should have higher level of income to sustain. That is, higher the CPI, higher is the cost of living in that region.
The correct option is ‘True’.
7.In this equation ‘V’ stands for the velocity of money or the number of times a piece of money is exchanged. So, the correct option is (b).
8.Money is not used as a standard of deferred payment, as it does not add any value if we just hold back the money. So, the correct option is (d).
9.In order to compare the two periods and the changes that took place in between the prices of those periods, we use the price index and we certainly have to keep the number goods and services (simply, the goods basket) constant. Here, the constant goods basket acts as a base for the analysis. So, the correct option is (b).
10.If an economy stays at a full employment level, then the increase in money supply fails to influence the aggregate demand by decreasing the interest rate, as there is no scope for further improvement in the employment level. So, the money supply then increase the price level only, which cause inflation in the economy. Thus, the correct option is (b).
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