Economics: Keynesian and Neoclassical Economics

Keynesian economics argues that recessions are basically caused by

insufficient aggregate demand

According to Keynes, a variety of factors affect consumption expenditure including ________.

disposable income and consumer confidence

According to Keynes, business investment is the most volatile component of aggregate demand because

it is closely tied to confidence and expidenture

Based on the Keynesian perspective, if the government decides to cut taxes, increase spending, or a mixture of both, then the economy is probably in a recession, and needs to

increase aggregate demand

Under Keynesian economics, recessions happen when aggregate demand (I.e. total expenditure) falls below ________ and ________.

full employment; potential GDP

According to Keynes, recessions are caused by a drop in aggregate demand that falls below potential GDP. What kind of intervention would NOT involve the government or the federal reserve to adjust the macroeconomy?

adjustment of sticky wages and prices

In a Keynesian framework, using an AD/AS diagram, which of the following government policy choices offer a possible solution to recession?

a reduction in taxes for businesses that increase investment

GDP gap

The difference between actual and potential real GDP; during recessions the gap grows; during booms the gap becomes negative

neoclassical economics

any of a number of economic perspectives that believes that the macro economy is inherently stable and that government should not attempt to manage the economy.

natural rate of unemployment

Rate that unemployment returns to in the long run, where there is no cyclical unemployment

neoclassical perspective

belief that the level of economic activity is determined primarily by aggregate supply

physical capital per person

the amount and kind of machinery and equipment available to help a person produce a good or service

potential GDP

level of output that can be achieved when all resources (land, labor, capital, and entrepreneurial ability) are fully employed

In a Keynesian framework, using an AD/AS diagram, which of the following government policy choices offer a possible solution to inflation?

a tax increase on consumer income

expenditure multiplier

Keynesian concept that asserts that a change in autonomous spending causes a more than proportionate change in real GDP

sticky wages and prices

a situation where wages and prices do not fall in response to a decrease in demand, or do not rise in response to an increase in demand

expenditure (or spending) multiplier

more of each additional dollar earned is spent, rather than saved

Neoclassical economists would view expansionary fiscal policy to stimulate aggregate demand as ________ and/but ________.

not effective; not useful

Which one of the following government policies could be described as a Keynesian response to a recession?

borrow from the public to finance increased spending on social welfare programs

Which one of the following government policies could be described as a neoclassical response to a recession?

abolish labor unions

Say's law is most consistent with which of the following policy responses to a recession?

provide subsidies for investment

Keynes' Law is most consistent with which of the following statement?

recessions are caused by a negative "shock" to aggregate demand

Inflation is not a concern in the Keynesian zone of the aggregate supply curve due to

excess capacity in the labor market, the intermediate goods markets, and the raw materials markets