The Keynesian Model in Action
After completing this chapter, students should be able to:
Understand that Keynesian theory argues that the economy is inherently unstable and
Money and the Federal Reserve System
Notice that, in the circular flow model in the chapter on GDP, money plays a central role in the
exchange of goods and services in the product markets and in the exchange of resource
This chapter expands on the discussion of the Federal Reserve System in the previous chapter.
Our focus will be on the creation of money, and the three tools used by the Fed to change the
Which of the following
statements is true?
a. Demand-pull inflation is caused by
excess total spending.
b. Cost-push inflation is caused by an
increase in resource costs.
c. If nominal interest rates remain the
same and the inflation rate falls, real
A Change in supply cannot be
caused by a change in
Price of other goods
The price of the good itself
The number of suppliers
An increase in demand
Results in a leftward shift of the demand
Suppose prices for new homes
have risen, yet the number of
new homes sold has also risen.
We can conclude that
a. the demand for new homes has risen.
b. the law of demand has been violated.
c. new firms have entered the construction
The French classical economist Jean
Baptiste Say transformed the equality
of production and spending into a law
that can be expressed asits own
a. The invisible hand creates
b. Wages always fall to the subsistence
c. Supply create
The phases of a business cycle
a. upswing and downswing.
b. full employment and unemployment.
c. peak, recession, trough, and recovery.
d. full employment, depression,
expansion, and plateau.
The phase of a business cycle
during which real GDP reaches
The dollar value of all final
goods and services produced
within the borders of a nation is
a. GNP deflator.
b. gross national product.
c. net national product.
d. gross domestic product.
Based on the circular flow
model, money flows from