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Say's law states that supply creates its own demand

because:

prices are such that producers know exactly how much to produce in the short run.



In the classical model, the economy will tend toward full employment because of 

the lack of inflation


The quantity theory of money held that, in the long run, the level of output was dependent on the stock of money and the price level.

True


Classical economists believed that the level of real output is determined by the:

labor market equilibrium.


Say

Keynes felt that a failing of classical theory was that neither labor markets nor product markets can be counted on to be self-regulating.


A major shortcoming of the quantity theory of money is that it cannot explain short-run fluctuations in the level of output and employment.

True


Keynes blamed economic downturns primarily on:

declines in the interest rate.

poor governmental management.

the instability of consumption.

the instability of investment.


Classical economists believed that the role of the government should be 

limited, more prominent, while Keynes believed the government should intervene when necessary.


According to the Keynesian consumption function, if disposable income increases, saving will increase but consumption will be unchanged.

False


If U.S. spending for foreign-made autos increases while foreign spending for autos made in the United States decreases, ceteris paribus, then

U.S. national income will increase.


"A given change in business investment spending will cause a larger change in equilibrium national income." This statement expresses an important Keynesian concept called the marginal propensity to consume,consumption function


If MPS = 1/3, the value of the expenditure multiplier is 5.0.

False


If the AE curve shifts upward, then the AD curve shifts to the right.


What is the appropriate fiscal policy when an economy goes into recession?

Increasing taxes



An increase in government spending shifts the AD curve to the 

right


If Y = $3,000, Y* = $3,900, and MPC = 0.9, the economy is not experiencing high inflation False


Discretionary fiscal policy has primarily demand side effects but can affect aggregate supply as well through the structure of tax changes or the composition of spending.



Excise taxes are not an automatic stabilizer.


If MFC is 0.8, then a $30 billion decrease in business investment spending will cause national income and output to increase by $150 billion.

False


Milton Friedman believes that the Keynesian consumption function does NOT reflect the way people behave because it considers only the current income of a household.

.


The lags for fiscal policy can be long and variable, thus making fiscal policy difficult to implement.


The political business cycle is a result of the use of fiscal policy to influence the outcome of elections.

False



Which of the following is NOT a Keynesian argument for using fiscal policy to influence the level of output and employment?

Inflation will necessarily accompany unemployment unless there is direct government intervention.



The difference between this year's receipts and this year's expenditures by the federal government is revenue


.

The philosophy of a cyclically balanced budget calls for the budget to be balanced every year.

True



If the structural deficit is negative (= structural surplus), fiscal policy is

neutral.


A structural deficit is the part of a deficit that would persist even if the economy were at the full-employment level.


Which of the following is true about the effects of running a budget deficit on a recession?

It can help end a recession by decreasing spending.



Indirect crowding out is a positive effect of running a deficit.


Steadily growing defense spending is one of the reasons deficits persist even during the expansionary phase of the business cycle.

False


If the government borrows to expand the productive capacity of the economy and put idle resources to work, then future generations will

inherit a larger capital stock and enjoy a higher output.


In the long run, internal debt will hurt the economy because when money leaves the country, it is not being used to help the economy.


The effect that debt has on an economy depends upon how large the debt is relative to the size of the economy.

True

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