Which of the following statements is inconsistent with the Classical Theory of Economics? supply creates its own demand the economy’s level of investment spending depends solely on the level of income. the economy will produce at the full-employment level of output. the economy has an environment of “laissez faire.” According to the quantity theory of money, inflation is ultimately controlled by private firms who set prices. the monetary authorities who control the money supply. those who control output.

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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  1. Which of the following statements is inconsistent with the Classical Theory of Economics?
  2. supply creates its own demand
  3. the economy’s level of investment spending depends solely on the level of income.
  4. the economy will produce at the full-employment level of output.
  5. the economy has an environment of “laissez faire.”

 

  1. According to the quantity theory of money, inflation is ultimately controlled by
  2. private firms who set prices.
  3. the monetary authorities who control the money supply.
  4. those who control output.
  5. the price of oil.

 

  1. According to the quantity theory of money, the quantity of money determines the
  2. interest rate.
  3. level of output.
  4. price level.
  5. level of employment.

 

  1. Which of the following statements is (are) correct? The equilibrium interest rate is the rate that
  2. equates the supply of funds with the demand for funds
  3. equates new saving with consumption
  4. equates private spending with investment
  5. All of the above

 

 

Keynesian Theory: multiple choices (5 points each)

 

  1. When considering the level of unemployment, Keynes emphasis was on ___.
  2. changes in technology
  3. aggregate demand
  4. inflationary expectations
  5. lending by financial institutions

 

  1. In the Keynesian model, a decrease in investment decreases ___.
  2. the money supply by an equal amount
  3. the money supply by a multiple amount
  4. income by a multiple amount
  5. income by an equal amount

 

  1. The marginal propensity to consume is:
  2. the change in consumption when there is a change in income.
  3. equal to the marginal propensity to save.
  4. equal to 1 minus the tax rate.
  5. the change in consumption associated with a change in wealth.

 

  1. For Keynes, the interest rate is determined by:
  2. the equilibrium between savings and investment
  3. the level of consumption
  4. liquidity preference by ‘bulls’ and ‘bears’ in the bonds market
  5. the level of investment

 

  1. Explain the differences between the Classical Theory and the Keynesian Theory in relation to:

 

  1. The importance of supply and demand
  2. Role of money
  3. Full employment
  4. Relation between savings and investment
  5. Using a graph of the classical labor market, illustrate the effects of a real wage existing in the market that is higher than the equilibrium real wage (draw the labor supply and labor demand curve), like a minimum wage, for example. What are the effects of this policy, according to the Classical Theory?
  1. True or false? Justify your answer.

In the classical model, when there is an increase in money supply, there will be an increase in investment and a decrease in the price level.

  1. What is the Say’s Law? And what is the consequence of Say’s Law for employment level?

Explain how, in Keynes’s theory, expectations affect investment demand. Why, to Keynes, aggregate demand is unstable?

 

 

 

 

 

 

 

 

 

 

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