Question 1

According to Milton Friedman, which of the following best describes the primary cause of inflation in an economy?

Accepted Answer

A persistent increase in the money supply.

Question 2

John Kenneth Galbraith, discussing Keynes, emphasized the importance of government intervention during economic downturns. Which policy tool did Keynes advocate for to combat unemployment during recessions?

Accepted Answer

Increasing government spending.

Question 3

Friedman’s theory of the natural rate of unemployment suggests that:

Accepted Answer

There is a level of unemployment that the economy cannot go below without causing accelerating inflation.

Question 4

Suppose the central bank increases the money supply by 10%. According to the Quantity Theory of Money as discussed by Friedman, what is the expected long-run effect on the price level, assuming velocity and real output are constant? Use the equation $$ M 	imes V = P 	imes Y .$$

Accepted Answer

The price level will increase by 10%.

Question 5

Keynesian economics, as explained by Galbraith, argues that during a recession, aggregate demand is insufficient. Which of the following best describes the Keynesian prescription for this problem?

Accepted Answer

Decrease taxes and increase government spending to boost aggregate demand.

Question 6

Friedman criticized the use of discretionary fiscal policy for economic stabilization. Which of the following is a reason he gave for preferring monetary policy rules over discretionary fiscal policy?

Accepted Answer

Discretionary fiscal policy is subject to long and variable lags, making it less reliable.

Question 7

Suppose the government increases its spending by $$100 billion, and the marginal propensity to consume (MPC) is 0.8. According to the Keynesian multiplier formula  k$$ = \frac{1}{1 - MPC} $, what is the total increase in aggregate demand?

Accepted Answer

$500 billion

Question 8

Which of the following statements best reflects Friedman’s view on the relationship between inflation and unemployment in the long run?

Accepted Answer

In the long run, there is no trade-off between inflation and unemployment.

Question 9

A country experiences stagflation, with high inflation and high unemployment. Which economist’s theory best explains why traditional Keynesian policies may not resolve this situation?

Accepted Answer

Milton Friedman

Question 10

According to Keynes, as discussed by Galbraith, what is the main reason that economies can remain stuck in prolonged periods of high unemployment?

Accepted Answer

Insufficient aggregate demand prevents full employment.

Question 11

If the velocity of money ($$V) $$increases while the money supply ($$M) $$and real output ($$Y) $$remain constant, what happens to the price level ($$P) $$according to the equation $$ M 	imes V = P 	imes Y $$?

Accepted Answer

The price level increases.

Question 12

Which of the following best describes the concept of 'animal spirits' as discussed by Keynes and referenced by Galbraith?

Accepted Answer

The unpredictable and irrational behavior of investors and consumers that affects economic outcomes.

Question 13

Friedman’s permanent income hypothesis suggests that:

Accepted Answer

People base their consumption decisions on their expected long-term average income.

Question 14

Suppose the government tries to reduce unemployment below the natural rate by increasing the money supply. According to Friedman, what is the likely long-term outcome?

Accepted Answer

Inflation will accelerate, but unemployment will return to the natural rate.

Question 15

Keynesian theory, as explained by Galbraith, would most likely recommend which of the following during a period of high unemployment and low inflation?

Accepted Answer

Increasing government spending and/or cutting taxes.

Question 16

Which of the following is a key difference between Friedman’s and Keynes’s views on the effectiveness of monetary policy?

Accepted Answer

Friedman emphasized the long-run effects of monetary policy, while Keynes focused on its short-run limitations.

Question 17

A government is considering two policies to combat a recession: (1) increasing the money supply, and (2) increasing government spending. According to Keynesian theory, which policy is likely to be more effective when interest rates are near zero?

Accepted Answer

Increasing government spending.

Question 18

Suppose the central bank follows a monetary rule and increases the money supply by 5% each year. If real output grows at 2% per year and velocity is constant, what is the expected inflation rate according to the Quantity Theory of Money ($$ M 	imes V = P 	imes Y $$)?

Accepted Answer

3%

Question 19

Which of the following scenarios best illustrates the concept of a liquidity trap as discussed in Keynesian economics?

Accepted Answer

Interest rates are very low, but increases in the money supply do not stimulate additional investment or spending.

Question 20

Friedman argued that inflation is 'always and everywhere a monetary phenomenon.' Which of the following real-world examples best supports this claim?

Accepted Answer

Hyperinflation in Zimbabwe following massive increases in the money supply.

Macroeconomic Schools of Thought: Milton Friedman and John Kenneth Galbraith on Keynes

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