Question

1) Which of the following is a not a key assumption of the Keynesian school of macroeconomics?

Select one:

A. Prices and wages are relatively inflexible

B. Expectations are relatively slow to adjust

C. Demand management can be used to smooth the business cycle

D. The main role of government policy should be to remove impediments to free markets

2) The idea that some economic changes are difficult to reverse is called:

Select one:

A. Stagflation

B. Deflation

C. The expectations-augmented Phillips curve

D. Hysteresis

Answer 1

Answer - option B

Reason - Expectations are relatively slow to adjust is not an assumption of keynesian school of economics because he thinks that people make use of every information present in economy before they expect anything from the economic policy.

A - Prices and wages are relatively rigid or inflexible because producers have multiple long term contracts with suppliers who fixes the price of products and this assumption helps to prevent them form price changes. Wages are fixed by this assumption because change in wages can increase the cost of the company.

C - Demand management can be used to smooth the business cycle because aggregate demand is influenced by many private economic and public economic decisions.So keynsian prefer a economy with mixed role of public and private sectors.Also demand is influenced by disposable income of a person so they can adjust their income with market conditions.

D- The main role of government policy should be to remove the impediments to free markets because keynsian believe that government's aggressive actions to bring the economy to stable position rely on that fact that government is capable and has enough knowledge to improve on the free market.