Question 1

According to the Keynesian theory, what is the primary source of business cycle fluctuations?

Accepted Answer

Aggregate output demand shocks

Question 2

Which of the following best describes price stickiness in the Keynesian model?

Accepted Answer

Prices adjust slowly to changes in the economy, often due to menu costs and monopolistic competition

Question 3

In the IS-LM framework, what happens to output and the real interest rate when there is a negative shock to consumer confidence?

Accepted Answer

IS curve shifts left, output falls, real interest rate falls

Question 4

Which equation represents the price-setting behavior of firms under monopolistic competition in the Keynesian model?

Accepted Answer

$$P = (1 + \eta) MC$$

Question 5

Why do Keynesians argue that money is not neutral in the short run?

Accepted Answer

Because price stickiness prevents immediate adjustment, so changes in money supply affect output and employment

Question 6

Suppose the government increases its purchases temporarily. According to the Keynesian IS-LM model, what is the immediate effect?

Accepted Answer

The IS curve shifts right, output and real interest rate increase

Question 7

Which of the following is a plausible reason for real-wage rigidity according to the efficiency wage model?

Accepted Answer

Firms pay higher wages to reduce worker shirking and increase effort

Question 8

In the Keynesian model, what is the effect of an increase in the nominal money supply?

Accepted Answer

LM curve shifts right, output rises, real interest rate falls

Question 9

Which of the following best describes the Keynesian view of unemployment during recessions?

Accepted Answer

Unemployment is largely cyclical, resulting from rigid real wages and insufficient demand

Question 10

If a negative supply shock (such as an oil price increase) occurs in the Keynesian model, what is the expected short-run outcome?

Accepted Answer

Output falls, inflation rises, real interest rate rises

Question 11

Which of the following is a difficulty associated with macroeconomic stabilization policy according to Keynesian theory?

Accepted Answer

It is hard to know how far the economy is from full employment and the quantitative impact of policies

Question 12

How do financial frictions affect the IS curve in the Keynesian model?

Accepted Answer

Financial frictions shift the IS curve to the left by raising borrowing costs and reducing spending

Question 13

Which formula represents the Keynesian output multiplier for government spending?

Accepted Answer

$$Y = C + I + G + (NX)$$

Question 14

In the efficiency wage model, what does the effort curve look like as real wages increase?

Accepted Answer

It is S-shaped, with effort rising at low wages and flattening at high wages

Question 15

Which of the following is a source of price stickiness in the Keynesian model?

Accepted Answer

Menu costs and monopolistic competition

Question 16

What is the effect of a tax cut in the Keynesian model?

Accepted Answer

Private consumption rises, national saving decreases, IS curve shifts right

Question 17

In the Keynesian AD-AS framework, what happens to the price level and output when expansionary fiscal policy is used in response to a demand shock?

Accepted Answer

Price level rises, output rises

Question 18

Which of the following statements is true regarding the effect of financial frictions during the 2007-2009 recession?

Accepted Answer

Credit spreads rose, offsetting the fall in the real federal funds rate and keeping real interest rates high for borrowers

Question 19

In the Keynesian model, what is the role of the effective labor demand curve $$ND^d(Y)$$?

Accepted Answer

It shows how much labor is needed to produce the output demanded

Question 20

Which of the following best explains why an increase in government purchases can crowd out private consumption and investment in the Keynesian model?

Accepted Answer

Because higher government spending raises the real interest rate, reducing private consumption and investment

Keynesianism: The Macroeconomics of Wage and Price Rigidity (Ch. 11 Study Notes)

Study Guide - Practice Questions