Determination of output and employment: classical and Keynesian approaches. - One Line Questions

1. If the MPC is 0.8, what is the value of the simple spending multiplier? — 5
2. In the classical model, a decrease in aggregate demand would lead to: — A fall in the price level, with output and employment remaining at full employment
3. In the context of the determination of output and employment, what does the 'short run' primarily refer to in Keynesian economics? — The period during which prices and wages are sticky or fixed
4. The classical economists believed that the economy would automatically return to full employment equilibrium through: — The invisible hand of the market, with flexible prices and wages
5. Who is considered the most prominent critic of the classical approach and the founder of modern macroeconomics? — John Maynard Keynes
6. According to classical economists, what is the primary determinant of the level of output and employment in an economy? — Aggregate supply
7. Keynes argued that the level of output and employment is primarily determined by: — Aggregate demand
8. The Keynesian Cross diagram illustrates the relationship between aggregate expenditure and: — National income (output)
9. Keynesian theory suggests that a fall in investment, due to pessimistic 'animal spirits', can lead to: — A multiplier-induced fall in aggregate income and employment
10. Keynesian economics suggests that a decrease in government spending, holding other factors constant, would likely lead to: — A decrease in aggregate demand and output, amplified by the multiplier
11. Keynesian economics suggests that during a recession, the government should: — Increase spending or cut taxes
12. In the classical framework, the aggregate production function relates output to which two factors? — Capital and labor
13. What does the classical economists' aggregate supply curve imply about the impact of changes in aggregate demand on output? — Changes in aggregate demand primarily affect the price level
14. The IS-LM model, developed after Keynes, integrates: — Keynesian aggregate demand with classical aggregate supply
15. In Keynesian theory, what is the relationship between consumption and income? — Consumption increases with income, but by less than the increase in income
16. In the Keynesian model, what determines the level of aggregate demand? — Consumption, Investment, Government Spending, and Net Exports (C+I+G+NX)
17. In the classical model, what mechanism ensures that the economy naturally tends towards full employment? — Flexible wages and prices
18. Keynesian economics emphasizes the role of 'sticky' wages and prices in explaining: — Persistent unemployment and recessions
19. According to Keynes, what is the primary reason for a deficiency in aggregate demand? — Volatile expectations and insufficient investment
20. Keynes argued that the demand for money is influenced by: — Income and the interest rate
21. Keynesian economics advocates for government intervention, particularly fiscal policy, to combat: — Recessions and unemployment
22. The 'liquidity trap' is a situation in Keynesian economics where: — Interest rates are very low, and monetary policy becomes ineffective
23. What is the classical economists' stance on the possibility of a general overproduction or persistent recession? — It is impossible due to Say's Law
24. What is the classical economists' view on the effectiveness of government intervention in managing output and employment? — It can often disrupt the natural market adjustments
25. What is the Keynesian view on the interest rate's role in influencing investment? — It influences investment, but expectations are also crucial
26. According to classical economists, what is the role of the money supply? — It is neutral in the long run, affecting only the price level
27. Which approach assumes that the economy is always at full employment in the long run? — Classical approach
28. According to classical economists, what is the main cause of involuntary unemployment? — Sticky wages above the market-clearing level
29. Which of the following is a core tenet of the Keynesian approach to output and employment determination? — Aggregate demand is the primary driver of short-run economic fluctuations
30. Keynesian economics challenges the classical dichotomy by arguing that: — Changes in the money supply can affect real output and employment in the short run
31. The classical theory of interest rate determination is based on the interaction of: — Investment and savings
32. The classical dichotomy separates: — Real and nominal variables
33. What is the classical economists' view on the role of savings? — Savings are essential for investment and economic growth
34. What is the Keynesian concept of 'liquidity preference'? — The desire to hold wealth in the form of money
35. The 'Paradox of Thrift' implies that if everyone tries to save more during a recession: — Aggregate demand will fall, leading to lower output and income
36. Which economic law states that 'supply creates its own demand'? — Say's Law
37. Keynes's primary focus in 'The General Theory' was to explain: — The causes of the Great Depression and persistent unemployment
38. The concept of 'effective demand' in Keynesian economics refers to: — The level of demand that is actually realized, determined by aggregate demand
39. What is the Keynesian concept of 'animal spirits'? — The psychological factors influencing investment decisions
40. Keynes argued that in a recession, savings might exceed investment, leading to a fall in aggregate demand. This is known as: — The paradox of thrift
41. The 'General Theory of Employment, Interest and Money' by John Maynard Keynes was published in response to: — The Great Depression
42. What is the marginal propensity to consume (MPC)? — The proportion of additional income consumed
43. Which factor is considered exogenous (determined outside the model) in the basic classical model of output and employment? — The stock of capital
44. In Keynesian economics, what is the 'Multiplier Effect'? — The amplified impact of changes in autonomous spending on total income
45. What role do flexible wages play in the classical theory of employment determination? — They automatically adjust to clear the labor market
46. In the classical view, the aggregate supply curve is: — Vertical at the full employment level of output
47. Keynesian economics posits that the aggregate supply curve is: — Horizontal or upward sloping, especially at less than full employment
48. The classical model assumes perfect information and rational expectations, leading to: — Stable economic growth
49. Which of the following is a key assumption of the classical model regarding the labor market? — Wages are flexible and adjust to clear the market
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