Keynesian Economics: Government Intervention in the Economy

Question 1

Keynesian economics differs from classical economics by advocating for a more active role of government in the economy. This is because Keynesian economics:

Accepted Answer

Recognizes market failures and rigidities

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Assumes perfect competition and flexible markets

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Believes government intervention always leads to desired outcomes

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Emphasizes the self-correcting nature of markets

Question 2

How did the Great Depression influence the emergence of Keynesian economics?

Accepted Answer

It challenged the classical belief in self-correcting markets due to high unemployment.

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Low interest rates during this period discouraged business investments.

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Deflation made it difficult for businesses to repay debts.

Question 3

How do central banks use interest rate and money supply adjustments as monetary policy tools to influence aggregate demand, according to Keynesian principles?

Accepted Answer

Lowering interest rates boosts investment and consumer spending, increasing aggregate demand.

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Increasing money supply solely through quantitative easing increases aggregate demand.

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Raising interest rates reduces inflation but does not affect aggregate demand.

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Increasing money supply through open market operations has no impact on aggregate demand.

Question 4

How can Keynesian economic policies contribute to inflation? Discuss the challenges of managing both unemployment and inflation simultaneously.

Accepted Answer

Keynesian policies, by increasing aggregate demand, can lead to higher prices and inflation, especially if the economy is operating near full capacity.

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Keynesian policies prioritize increasing government spending, which can lead to higher prices and inflation.

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Keynesian policies solely focus on addressing unemployment and have no impact on inflation.

Question 5

A fundamental tenet of Keynesian Economics is:

Accepted Answer

Government action is vital for stimulating aggregate demand.

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The market is self-correcting and does not require external intervention.

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Private sector investment is the primary driver of economic growth.

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Fiscal policy is ineffective in influencing economic activity.

Question 6

According to Keynesian theory, the primary factor influencing short-term economic output is:

Accepted Answer

Aggregate demand

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Aggregate supply

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Price level

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Interest rates

Question 7

In Keynesian Economics, the "multiplier effect" refers to:

Accepted Answer

The increase in economic output resulting from an initial increase in spending.

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The decrease in economic output resulting from an initial increase in taxation.

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The amount of money the government spends on infrastructure projects.

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The level of private investment in the economy.

Question 8

John Maynard Keynes' response to the Great Depression involved:

Accepted Answer

Advocating for government intervention to boost aggregate demand.

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Promoting a balanced budget approach to economic recovery.

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Believing the market would self-correct without government intervention.

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Proposing a system of fixed exchange rates.

Question 9

A key assumption in Keynesian Economics is that:

Accepted Answer

Aggregate demand is generally less than aggregate supply.

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The economy is always at full employment.

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Government spending has no impact on economic output.

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Wages and prices are fully flexible.

Question 10

In Keynesian Economics, the "liquidity trap" refers to:

Accepted Answer

A situation where interest rates are so low that monetary policy becomes ineffective.

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A period of high demand for money.

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A period of economic prosperity with high growth and low unemployment.

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A state of equilibrium where aggregate demand and aggregate supply are equal.

Question 11

According to Keynesian economics, what is the primary driver of economic growth?

Accepted Answer

Government intervention in stimulating aggregate demand

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Unrestricted free markets

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Technological innovation

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Increased consumer spending

Question 12

What is the term for the increase in GDP resulting from a change in government spending?

Accepted Answer

Multiplier Effect

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Crowding-out Effect

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Fiscal Stimulus

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Economic Expansion

Question 13

Which fiscal policy measure would be employed to increase aggregate demand?

Accepted Answer

Tax cuts

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Interest rate hikes

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Government spending reductions

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Quantitative tightening

Question 14

What is the overarching objective of Keynesian economic policies?

Accepted Answer

To reduce unemployment

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To maintain price stability

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To balance the government budget

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To promote economic deregulation

Question 15

What is the IS-LM model used for?

Accepted Answer

Analyzing equilibrium in the goods and money markets

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Calculating optimal government spending levels

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Controlling inflation

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Predicting economic fluctuations

Question 16

Who is widely regarded as the founder of Keynesian economics?

Accepted Answer

John Maynard Keynes

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Milton Friedman

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Paul Samuelson

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Adam Smith

Question 17

How does Keynesian theory emphasize the role of expectations?

Accepted Answer

Expectations significantly influence investment and consumer spending decisions

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Expectations have no impact on economic outcomes

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Expectations are relevant only in the long run

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Expectations play no role in determining economic growth

Question 18

How has Keynesian economics influenced contemporary economic policymaking?

Accepted Answer

Increased emphasis on fiscal policy

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Reduced role of central banks in economic management

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Shift towards prioritizing long-term economic growth

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Decline in government regulations

Question 19

What is the multiplier effect in Keynesian economics?

Accepted Answer

The increase in GDP resulting from an initial increase in government spending.

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The decrease in GDP resulting from a decrease in consumer spending.

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The increase in inflation resulting from an increase in money supply.

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The decrease in unemployment resulting from a decrease in interest rates.

Question 20

According to Keynesian theory, which of the following is NOT a factor that can contribute to an economic recession?

Accepted Answer

High consumer confidence

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Insufficient aggregate demand

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Excessive government regulation

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Falling business investment

Question 21

What is the primary objective of Keynesian fiscal policy?

Accepted Answer

To stimulate aggregate demand.

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To reduce government debt.

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To control inflation.

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To stabilize exchange rates.

Question 22

How does Keynesian economics view saving?

Accepted Answer

As a negative contributor to economic growth.

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As a positive contributor to economic growth.

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As a neutral factor in economic growth.

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It does not consider saving.

Question 23

How does Keynesian economics perceive the government's role in the economy?

Accepted Answer

As an active participant.

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As an inactive observer.

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As an unnecessary impediment.

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As a threat to economic freedom.

Question 24

Who is widely recognized as the founder of Keynesian economics?

Accepted Answer

John Maynard Keynes

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Milton Friedman

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Karl Marx

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Adam Smith

Question 25

According to Keynesian economics, what is the primary policy response to supply-side constraints causing inflation?

Accepted Answer

Provide subsidies to businesses to boost production and efficiency.

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Reduce government spending to decrease aggregate demand.

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Increase the money supply to stimulate economic growth.

Question 26

According to Keynesian Economics, which factor is crucial for economic growth?

Accepted Answer

Aggregate demand

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Aggregate supply

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Price stability

Question 27

Which component is essential for the functioning of the Keynesian multiplier effect?

Accepted Answer

Propensity to consume

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Propensity to save

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Central bank interest rates

Question 28

What is the primary goal of fiscal policy in Keynesian Economics?

Accepted Answer

Stimulating aggregate demand through increased government spending or tax cuts

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Reducing government expenditure to curb inflation

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Balancing the government budget

Question 29

Which of the following is NOT a criticism of Keynesian Economics?

Accepted Answer

It does not consider the importance of supply-side factors.

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It can lead to inflation under certain circumstances.

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Its assumptions may not always accurately reflect economic behavior.

Question 30

During an economic recession, Keynesian economists recommend:

Accepted Answer

Increasing government spending and/or reducing taxes to stimulate aggregate demand

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Raising interest rates to reduce inflation

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Cutting government spending to balance the budget

Question 31

Which outcome is a potential advantage of implementing Keynesian policies to encourage economic growth?

Accepted Answer

Increased job opportunities

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Decreased inflation

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Improved budget surplus

Question 32

Keynesian economists believe that:

Accepted Answer

Government intervention may be necessary to achieve full employment.

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The economy will always naturally return to full employment.

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Fiscal policy is always more effective than monetary policy.

Question 33

What is the multiplier effect in the context of Keynesian Economics?

Accepted Answer

The impact of government spending on aggregate demand is greater than the amount of spending.

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The impact of government spending on aggregate demand is smaller than the amount of spending.

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Government spending has no impact on aggregate demand.

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The impact of government spending on aggregate demand is inversely related to the marginal propensity to consume.

Question 34

Explain the distinction between ex ante and ex post saving.

Accepted Answer

Ex ante saving represents planned saving, while ex post saving represents actual saving.

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Ex post saving represents planned saving, while ex ante saving represents actual saving.

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Ex ante and ex post saving are always equal.

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Ex ante and ex post saving are only equal in equilibrium.

Question 35

What is the Keynesian liquidity trap?

Accepted Answer

A situation where interest rates are so low that monetary policy becomes ineffective in stimulating aggregate demand.

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A situation where interest rates are so high that monetary policy is effective in stimulating aggregate demand.

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A situation where the economy is in recession and the government resists fiscal stimulus.

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A situation where the economy is experiencing inflation and the government resists monetary stimulus.

Question 36

Which economist is widely recognized as the founder of Keynesian Economics?

Accepted Answer

John Maynard Keynes

Answer

Milton Friedman

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Alfred Marshall

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Adam Smith

Question 37

How does Keynesian Economics differ from neoclassical economics?

Accepted Answer

Keynesian Economics emphasizes government intervention, while neoclassical economics advocates for a self-regulating economy.

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Neoclassical economics emphasizes government intervention, while Keynesian Economics advocates for a self-regulating economy.

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Keynesian Economics assumes sticky wages and prices, while neoclassical economics assumes flexibility.

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Neoclassical economics assumes sticky wages and prices, while Keynesian Economics assumes flexibility.

Question 38

What is the main difference in how Keynesian and classical economists view the role of government?

Accepted Answer

Keynesians favor government intervention, while classical economists prefer laissez-faire policies.

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Keynesians believe in Say's Law, while classical economists do not.

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Keynesians assume perfect competition, whereas classical economists acknowledge market imperfections.

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Keynesian economics focuses solely on aggregate demand, while classical economics emphasizes both demand and supply.

Question 39

In Keynesian economics, which policy tool is primarily employed to boost aggregate demand?

Accepted Answer

Fiscal policy, involving government spending and tax adjustments.

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Monetary policy, focusing on interest rate manipulation.

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Supply-side policies, aimed at promoting economic growth through deregulation and tax cuts.

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International trade policies, such as tariffs and subsidies.

Question 40

Which of the following is NOT a potential advantage of Keynesian policies?

Accepted Answer

Eliminating inflation.

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Stabilizing the economy during recessions.

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Stimulating economic growth.

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Reducing unemployment.

Question 41

In Keynesian economics, the multiplier effect refers to:

Accepted Answer

The amplified increase in aggregate output resulting from an initial increase in aggregate demand.

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The reduction in aggregate output caused by an initial decrease in aggregate demand.

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The impact of interest rate changes on investment and economic growth.

Question 42

Which criticism is frequently leveled against Keynesian economics?

Accepted Answer

Excessive implementation can lead to inflationary pressures.

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It is only applicable in the short term.

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It contradicts the principles of classical economic theory.

Question 43

Which historical event played a significant role in shaping the development of Keynesian economics?

Accepted Answer

The Great Depression.

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The Industrial Revolution.

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The Renaissance.

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The Vietnam War.

Question 44

What is the significance of the IS-LM model in Keynesian economics?

Accepted Answer

It analyzes the interplay between the goods and money markets to determine economic equilibrium.

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It facilitates the design and evaluation of fiscal and monetary policies.

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It predicts future economic growth and inflation.

Question 45

Who is widely recognized as the father of Keynesian economics?

Accepted Answer

John Maynard Keynes.

Answer

Milton Friedman.

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Adam Smith.

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Karl Marx.

Question 46

What is the primary objective of Keynesian fiscal policy?

Accepted Answer

To stimulate economic growth by increasing aggregate demand.

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To decrease the national debt.

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To reduce the size of government.

Question 47

Which of the following is a core principle of Keynesian Economics?

Accepted Answer

Government intervention can stimulate economic growth by increasing aggregate demand.

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Monetary policy is the sole determinant of economic growth.

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Government spending always leads to inflation.

Question 48

What is the multiplier effect?

Accepted Answer

The amplified effect of an initial change in spending on aggregate demand.

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The increase in government spending required to stimulate economic growth.

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The decrease in unemployment resulting from government intervention.

Question 49

Which of the following is a fiscal policy tool commonly used by Keynesian economists?

Accepted Answer

Tax rebates

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Raising interest rates

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Increasing the money supply

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Selling government bonds

Question 50

What is the concept of the liquidity trap?

Accepted Answer

A situation where monetary policy is ineffective in stimulating economic growth due to low interest rates.

Answer

A period of high inflation and unemployment.

Question 51

Which of the following is a criticism of Keynesian Economics?

Accepted Answer

Government intervention can lead to inefficiencies and market distortions.

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It is not supported by empirical evidence.

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It always leads to economic growth.

Question 52

What is the distinction between ex ante and ex post saving?

Accepted Answer

Ex ante saving represents planned saving, while ex post saving is actual saving.

Answer

Ex ante saving is always higher than ex post saving.

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Ex post saving is equal to investment in a closed economy.

Question 53

Which of the following is a limitation of the Keynesian multiplier?

Accepted Answer

It assumes a constant marginal propensity to consume.

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It is only applicable in the long run.

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It does not account for government borrowing.

Question 54

How do expectations influence Keynesian Economics?

Accepted Answer

Expectations can affect consumer spending and investment, impacting aggregate demand.

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Keynesian economists dismiss the role of expectations.

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Expectations are always rational and accurate.

Question 55

Which of the following is a Keynesian policy recommendation during a recession?

Accepted Answer

Increase government spending and decrease taxes.

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Raise interest rates and reduce the money supply.

Answer

Reduce government spending and increase taxes.

Answer

Deregulate the economy and limit government intervention.

Question 56

What is the fundamental difference between Keynesian Economics and classical economics?

Accepted Answer

Keynesian Economics advocates for government intervention while classical economics promotes free markets.

Answer

Both Keynesian and classical economics support government intervention.