Q: Suppose the government increases spending by $$500$$ million and the MPC is $$0.75. $$What is the total change in income according to the multiplier principle?

$$\frac{1}{1-0.75} \times 500 = 4 \times 500 = 2000$$ million

Question 1

According to Keynesian economics, what is the primary cause of economic instability in market economies?

Accepted Answer

Fluctuations in total spending (aggregate demand)

Question 2

Which of the following best describes the Keynesian concept of equilibrium?

Accepted Answer

Equilibrium occurs when total spending equals current output.

Question 3

If the marginal propensity to consume (MPC) is $$0.8$$, what is the value of the simple spending multiplier?

Accepted Answer

$$\frac{1}{1-0.8} = 5$$

Question 4

During the Great Depression, Keynes argued that the economy remained in a depressed state because:

Accepted Answer

Total spending was insufficient to purchase the output produced.

Question 5

Which policy would a Keynesian economist most likely recommend during a recession?

Accepted Answer

Increase government spending and/or cut taxes to boost aggregate demand.

Question 6

Suppose the government increases spending by $$500$$ million and the MPC is $$0.75. $$What is the total change in income according to the multiplier principle?

Accepted Answer

$$\frac{1}{1-0.75} 	imes 500 = 4 	imes 500 = 2000$$ million

Question 7

What is the main risk associated with improper timing of discretionary fiscal policy?

Accepted Answer

It can increase economic instability rather than reduce it.

Question 8

Which of the following is an example of an automatic stabilizer?

Accepted Answer

Unemployment insurance payments

Question 9

According to the Keynesian view, what should the government do when strong demand threatens to cause inflation?

Accepted Answer

Run a budget surplus by reducing spending or increasing taxes.

Question 10

The paradox of thrift suggests that if everyone tries to save more during a recession:

Accepted Answer

Aggregate demand will fall, leading to lower income and possibly less total saving.

Question 11

Which of the following best explains why the Keynesian fiscal stimulus during the 2008-2009 recession was less effective than expected?

Accepted Answer

High household debt made consumers reluctant to spend additional income.

Question 12

If the government wants to use restrictive fiscal policy to combat inflation, which action should it take?

Accepted Answer

Decrease government spending or increase taxes to reduce aggregate demand.

Question 13

Which of the following statements is most consistent with Keynesian economics?

Accepted Answer

Government intervention can help stabilize the economy during periods of recession or inflation.

Question 14

What does the multiplier effect imply about the impact of a decrease in spending?

Accepted Answer

A decrease in spending will be magnified, leading to a larger decrease in income.

Question 15

Which of the following is a key reason why Keynesian economics lost influence in the 1970s?

Accepted Answer

It could not explain the simultaneous occurrence of high unemployment and inflation.

Question 16

If the marginal propensity to consume (MPC) is $$0.6$$ and the government increases spending by $$200$$ million, what is the total increase in income?

Accepted Answer

$$\frac{1}{1-0.6} 	imes 200 = 2.5 	imes 200 = 500$$ million

Question 17

Which of the following best describes the Keynesian recommendation for fiscal policy over the business cycle?

Accepted Answer

Run deficits during recessions and surpluses during booms.

Question 18

What does the household debt to income ratio chart from 1960-2019 suggest about the financial position of American households before the Great Recession?

Accepted Answer

Households were highly leveraged, making them vulnerable to economic shocks.

Fiscal Policy: The Keynesian View and the Historical Development of Macroeconomics

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