lesson 8 quiz - 1. While Classical Theory emphasized the...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1. While Classical Theory emphasized the role of Say’s Law, the new Keynesian alternative was that new demand creates it own supply . 2. Keynes felt that wages and prices were not very flexible in a downward direction. 3. When the quantity of AD becomes greater than the quantity of AS (AD shifted right ), businesses will increase output and employment to replace inventories. 4. Keynesian Theory assumptions are shown in the AS/AD graph above. Because there is still some unused capacity in Stage 2 , if Government spending increases then AD increases (in theory) will result only in moderately rising prices. 5. The Keynesian Theory “Bathtub” is illustrated above. If leakages increase with constant injections, the level of water (income, employment and output) will decrease 6. If income increases from $20,000 to $30,000 and $9,000 of the new income is spent on consumption, then the MPC is 0.9 7. If the MPC is 0.8 and a component of AD, such as Investment, is increased by $5, then the maximum amount of change in income and output for the nation would be $25. 8. If Government (or Investment) spending is increased by $10 with an MPS of 0.25, then the maximum overall change in income will be $40 . 9. In this example of the Keynesian adjustment process, the overall backshift in Aggregate Demand after the multiplier effects are completed cause Real Spending GDP to decrease by a total of $ 500 billion dollars. 10. In this example of the Keynesian adjustment process, the total number of unemployed people after the downward multiplier effects are completed is 10 million. 11. Among the ideas put forth as an alternative to the Classical model in the 1930’s, was the Planned (or Command) model being tried in the Soviet Union and Italy. 12. Keynes believed that Consumption spending would decline during a recession and not automatically bounce back causing business inventories to become stuck at an undesirably high level. 13. The size of the multiplier which is applied to a change in AD is dependent upon the MPC (or MPS) 14. With the multiplier effect , Government spending can have a significantly magnified impact on aggregate demand beyond just the initial increase in spending. 15. Classical theorists reacted negatively to Keynesian initiatives by saying that deficit spending by government would make funds unavailable to the private sector. This criticism is termed the crowding out effect. 16. During the Depression the Classical Theorists were convinced that an increase in government spending was not necessary and that the economy would eventually adjust on its own. 17. The relationship of Aggregate Demand (AD) to Aggregate Supply (AS) is critical in determining economic activity. 18. If one saves $2,000 out of $10,000 of income then the APS is
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 4

lesson 8 quiz - 1. While Classical Theory emphasized the...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online