1. Which of the following is/are implied by the strong version of Say's Law?
[1] Output generates an equivalent level of spending.
[2] Output is determined at its full employment level.
[3] Desired saving always equals desired investment spending.
[4] E = C(r) + I(r) = Y.
[5] All of the above.
2. In the classical model of the labour market, voluntary unemployment will increase if:
[1] the leisure preference of workers decreases.
[2] technological progress shifts the production function upwards.
[3] real wages are set below the market equilibrium level.
[4] All of the above.
[5] None of the above.
3. Which of the following is/are an example of involuntary unemployment?
[1] A housewife.
[2] A student.
[3] A subsistence farmer.
[4] A pensioner.
[5] None of the above.
4. Which of the following contradict(s) the classical explanation of the economy?
[1] Voluntary unemployment.
[2] Frictional unemployment.
[3] Full employment.
[4] Search unemployment.
[5] None of the above.
5. In Keynes's theory of employment and output:
[1] output and employment determine aggregate demand.
[2] output and aggregate demand determine employment.
[3] aggregate demand determines output and employment.
[4] employment determines output and aggregate demand.
[5] None of the above.
In questions 6-10, according to the classical theory:
6. The demand for money will decrease if:
[1] nominal output increases.
[2] the price level increases.
[3] real output increases.
[4] the interest rate increases.
[5] None of the above.
7. Increases in the money supply will lead to:
[1] a decrease in the nominal interest rate.
[2] a decrease in the real interest rate.
[3] an increase in the real interest rate.
[4] an increase in the nominal interest rate.
[5] None of the above.
8. Decreases in the money supply will lead to:
[1] higher prices and higher real output.
[2] lower prices and lower real output.
[3] higher nominal wages and higher nominal output.
[4] higher real wages and lower nominal output.
[5] None of the above.
9. The real rate of interest will decrease if the desire to save ( ) or the return on investment
( ).
[1] increases ; increases.
[2] decreases ; decreases.
[3] increases ; decreases.
[4] decreases ; increases.
[5] None of the above.
10. An increase in desired saving leads to:
[1] an equivalent decrease in investment spending.
[2] a decrease in the real interest rate.
[3] an equivalent increase in consumption spending.
[4] a decrease in real output by a multiple of the increase in saving.
[5] None of the above.
11. Keynes accepted what he called the first postulate of classical economics but rejected the second postulate. Keynes thus accepted the classical belief that:
a. the supply of labour is solely a function of the real wage.
b. more workers will only be employed if the real wage decreases.
c. the equilibrium wage equals the marginal product of labour.
[1] All of the above.
[2] None of the above.
[3] a b
[4] c
[5] b
12. Given that the first postulate of classical economics holds, a decrease in employment is associated with:
[1] a decrease in the real wage.
[2] an increase in the real wage.
[3] an increase in nominal wages.
[4] no change in real wages.
[5] None of the above.
13. According to Tobin (1993), examples of Keynesian unemployment include situations where:
[1] trade unions increase real wages above their market clearing rates.
[2] expectations of being unemployed increase current spending of households.
[3] unemployment benefits increase the reservation wages of workers.
[4] there is an excess supply of unskilled labour.
[5] None of the above.
14. According to Tobin (1993), Keynesian macroeconomics relies on the idea that:
[1] nominal wages and/or prices are rigid.
[2] individuals are often irrational and suffer from "money illusion".
[3] output and employment are constrained by aggregate demand.
[4] less than desired sales in one market will increase demand in other markets.
[5] None of the above.
15. Which of the following does Skidelsky (2011) emphasize as supporting the relevance of Keynes's ideas in analyzing the 2007-8 financial crisis and the recession that followed it?
[1] Sticky wages and prices preventing the adjustment of employment to lower aggregate demand.
[2] Global imbalances in the desire to save and invest.
[3] Excessive budget deficits and increases in public debt.
[4] The mispricing of risky financial assets.
[5] Expansion of the money supply through Quantitative Easing.
16. According to Keynes, involuntary unemployment can be dealt with by:
a. decreasing real wages through an increase in the price level brought about by an increase in aggregate demand.
b. ensuring that there is nominal wage flexibility in the economy.
c. decreasing nominal wages which causes a decrease in real wages and consequently firms employ more workers.
[1] All of the above.
[2] None of the above.
[3] a
[4] b
[5] c
17. Which of the following classical interpretations of Say's Law was rejected by Keynes?
a. The act of saving leads to a corresponding increase in investment.
b. The interest rate is determined in the loanable funds market.
c. Supply creates its own demand at a less than full employment level of output.
[1] All of the above.
[2] None of the above.
[3] a b
[4] b c
[5] a c
18. Which of the following supports Say's Law?
a. Investment spending is a negative function of the interest rate.
b. An increase in saving causes a decrease in the interest rate and consequently investment spending increases and the total demand for goods is unchanged.
c. The interest rate is determined in the money market and not by differences in the desire to save and invest.
[1] a b
[2] b c
[3] a
[4] b
[5] c
19. In considering the nominal interest rate as an equilibrating mechanism, Tobin (1993) argues that:
a. the nominal interest rate might not fall far enough to ensure full employment.
b. an increase in the money supply is necessary to ensure that the interest rate falls far enough to help maintain full employment.
c. in the liquidity trap case the fall in the interest rate may not be enough to restore full employment.
[1] All of the above.
[2] None of the above.
[3] a b
[4] a c
[5] b c
20. In explaining the principle of effective demand, Keynes argued that:
a. an increase in employment increases household income.
b. as household income increases, consumption spending increases by less than the increase in income.
c. if an increase in employment were devoted to the production of consumer goods then the demand for consumer goods will be greater than the supply of consumer goods.
[1] All of the above.
[2] None of the above.
[3] a b
[4] a c
[5] b c
21. According to Keynes, the volatility of investment spending is due to:
[1] the marginal efficiency of investment.
[2] changes in expectations of the future interest rate.
[3] expected changes in monetary policy.
[4] changes in expectations of the future rate of return of investment.
[5] All of the above.
22. According to Keynes, an increase in desired saving will have the following consequences:
a. Investment will increase.
b. Income will increase.
c. Output will increase by more than the increase in investment spending.
d. Employment will increase.
[1] All of the above.
[2] None of the above.
[3] a b d
[4] a c d
[5] b c d
23. The behavioural function for consumption C = a + cY indicates that consumption spending:
[1] is a negative function of output and income.
[2] is a positive function of the interest rate.
[3] is a positive function of the marginal propensity to save.
[4] increases by less than a given increase in income.
[5] None of the above.
24. Regarding investment, Keynes argued that:
[1] investment spending will increase if there is an increase in saving.
[2] expectations of future profitability leads to stability in investment spending.
[3] higher interest rates lead to greater investment spending.
[4] low interest rates may not provide sufficient inducement to investment spending.
[5] None of the above.
25. According to Keynes, the following actions may lead to an increase in the level of output and employment:
[1] The money supply can be decreased, leading to higher interest rates and lower inflation.
[2] Both taxation and government spending can be increased by the same amount.
[3] Decreasing the budget deficit and less borrowing by the government.
[4] All of the above.
[5] None of the above.
26. In the IS-LM model, a contractionary monetary policy leads to:
a. an increase in government spending and the level of output.
b. an increase in the demand for money, an increase in the interest rate and a decrease in government spending.
c. a decrease in the supply of money, an increase in the interest rate and an increase in investment spending.
[1] None of the above.
[2] a
[3] c
[4] b c
[5] a b
27. In the IS-LM model, when comparing the result of an expansionary monetary policy to an expansionary fiscal policy:
[1] in both instances the demand for goods and the level of output are higher.
[2] for monetary policy investment spending is higher while for fiscal policy it is lower.
[3] for monetary policy the interest rate is lower while for fiscal policy it is higher.
[4] All of the above.
[5] None of the above.
28. Crowding out occurs in the IS-LM model since increases in government spending lead to:
[1] increases in the interest rate and higher inflation.
[2] increases in the interest rate which decrease investment spending
[3] increases in tax revenue which decrease consumption spending.
[4] increases in the interest rate which decrease consumption spending.
[5] increases in the interest rate and lower inflation.
29. Which of the following will lower the impact of an expansionary monetary policy on the level of output?
a. A low interest elasticity of investment spending.
b. A high interest elasticity of the demand for money.
c. A large multiplier.
[1] a b
[2] a c
[3] b c
[4] All of the above.
[5] None of the above.
30. If the IS-LM model is modified by including perfectly flexible wages and prices, the following general results are obtained:
[1] Full employment equilibrium is achievable.
[2] The Keynes effect helps to ensure that full employment is reached.
[3] There is no involuntary unemployment.
[4] The demand determined level of employment will be at the full employment level.
[5] All of the above.
31. In the IS-LM model with perfectly flexible wages and prices, involuntary unemployment may occur due to:
[1] the Pigou effect .
[2] a low interest elasticity of investment spending.
[3] a low interest elasticity of the demand for money.
[4] the Keynes effect.
[5] All of the above.
32. Coddington (1976) classifies the IS-LM model as part of:
[1] Hydraulic Keynesianism since it embodies the idea that there are stable relationships between macroeconomic flows.
[2] Fundamentalist Keynesianism since it incorporates adaptive expectations.
[3] Reconstituted reductionism since it embraces equilibrium theorizing.
[4] New Keynesian economics since it explains inflexible wages and prices as part of rational behaviour.
[5] None of the above.
33. According to the original Phillips curve analysis:
[1] policy makers are faced with a choice between higher inflation and higher unemployment.
[2] a rightward shift of the Phillips curve shows that a given unemployment rate is associated with a higher inflation rate.
[3] the more inflexible the labour market, the less the trade-off between inflation and unemployment.
[4] the use of activist policies such as fiscal policy to decrease unemployment will cause a decrease in the price level.
[5] a positive relationship exists between changes in money wages and unemployment.
34. The orthodox Keynesian interpretation of the Phillips curve is that:
[1] a permanently lower unemployment rate can be achieved through temporarily higher rates of inflation.
[2] the rate of increase in money wage rates will be greater the lesser the excess demand for labour.
[3] it provides the authorities with a menu of possible inflation-wage rate combinations.
[4] a permanently lower unemployment rate can be achieved through permanently lower rates of inflation.
[5] None of the above.
35. Which of the following is a central proposition of orthodox Keynesianism?
[1] Output is constrained by aggregate supply.
[2] The existence of voluntary unemployment.
[3] Aggregate demand is constrained by output.
[4] Flexible prices and wages.
[5] The non-neutrality of money.
36. In Friedman's restatement of the quantity theory of money, the demand for real money balances will increase if:
[1] inflation is expected to decrease.
[2] interest rates increase.
[3] liquidity preference decreases.
[4] the expected return on equities decreases.
[5] None of the above.
37. Which of the following do not accord with the quantity theory of money?
[1] Changes in the money supply largely determine changes in real income.
[2] Changes in the demand for money depend on changes in nominal income.
[3] Changes in the demand for money are a stable function of variables other than those determining the money supply.
[4] Changes in the demand for money are largely independent of changes in the supply of money over the short to medium term.
[5] Changes in the money supply largely determine changes in nominal income.
38. According to orthodox monetarists like Milton Friedman:
[1] the velocity of circulation of the money stock (V) is unstable.
[2] an increase in the money supply leads to a fall in the interest rate and hence an increase in the price level.
[3] increases in the real money supply lead to increases in real income.
[4] the money supply is mainly a function of the demand for credit.
[5] None of the above.
39. Orthodox monetarists like Milton Friedman assert that changes in the price level are the result of prior changes in:
[1] nominal income.
[2] the money supply.
[3] adaptive expectations.
[4] the demand for money.
[5] rational expectations.
40. In terms of the IS-LM model, the extreme monetarist argument is that the:
[1] IS curve is horizontal.
[2] IS curve is downward sloping.
[3] LM curve is upward sloping.
[4] LM curve is horizontal.
[5] None of the above.
41. Which of the following summaries of empirical evidence best supports the orthodox monetarist position?
[1] Changes in the money supply bear no clear relationship to changes in the business cycle.
[2] The money supply rises on average during both economic contractions and expansions.
[3] The money supply increases at a faster rate during economic contractions than expansions.
[4] The money supply increases at a slower rate during economic expansions than contractions.
[5] The money supply increases at a slower rate during economic contractions than expansions.
42. At the natural rate of unemployment:
[1] the inflation rate is zero.
[2] real wage rates are falling.
[3] the inflation rate is accelerating.
[4] the real interest rate is constant.
[5] the inflation rate is decelerating.
43. Friedman's concept of the natural rate of unemployment implies that it can be lowered:
[1] by stable monetary policies such as a fixed rate of monetary growth rule.
[2] by lowering real wages.
[3] by removing restrictions and allowing greater flexibility in the labour market.
[4] in the short run but not in the long run.
[5] All of the above.
44. Which of the following statements best summarizes Friedman's view of how expectations of inflation are formed?
[1] The expected inflation rate adjusts gradually to changes in the actual inflation rate, with greater weight given to the most recent changes in the inflation rate.
[2] An increase in the actual inflation rate leads to a rapid acceleration in the expected inflation rate.
[3] The expected inflation rate adjusts rapidly in response to new information about changes in monetary policy.
[4] A change in the expected inflation rate equals the most recent change in the actual inflation rate.
[5] The expected inflation rate adjusts quickly to changes in the actual inflation rate, with greater weight given to the more distant changes in the inflation rate.
45. In Friedman's interpretation of the Phillips curve, an expansionary monetary policy will:
[1] increase both inflation and nominal output in the short run and the long run.
[2] decrease real interest rates in the short run but not in the long run.
[3] lower the natural rate of unemployment in the short run but not in the long run.
[4] increase real output in the long run.
[5] None of the above.
46. In Friedman's interpretation of the Phillips curve, following an expansionary monetary policy:
[1] both money and real wages increase initially and then decrease.
[2] money wages increase initially and then decrease.
[3] money wages increase initially while real wages remain unchanged.
[4] real wages increase initially and then decrease.
[5] Money wages increase initially while real wages decrease.
47. Monetary policies aimed at a sharp reduction in the inflation rate will:
[1] Lead to a similarly sharp increase in unemployment in the short run.
[2] Not have any effect in either the short or the long run.
[3] Lead to a similarly sharp increase in output and employment in the short run.
[4] be successful in the long run but not in the short run.
[5] None of the above.
In questions 48-50, which statement best summarizes Friedman's views on the role of monetary policy?
48. Monetary policy should best be conducted by:
[1] Controlling the price level.
[2] Controlling the interest rate.
[3] Controlling the exchange rate.
[4] Targeting the inflation rate.
[5] None of the above.
49. Monetary policy can:
[1] Only cushion the effect of aggregate supply shocks to the economy.
[2] Only cushion the effect of aggregate demand shocks to the economy.
[3] Cushion the effect of both aggregate demand and supply shocks to the economy.
[4] Prevent the occurrence of contractions in output and employment if used sensibly, such as following a fixed monetary growth rate rule.
[5] Stabilize the business cycle over time.
50. Monetary policy cannot:
[1] Lower real interest rates in the short run.
[2] Lower nominal interest rates in the long run.
[3] Lower nominal interest rates in the short run.
[4] Avoid engaging in successively larger open market operations.
[5] All of the above.