Question

Question 91 pts

The economy has a contractionary gap. According to the Keynesians, the government should:

do nothing and let the economy fix itself.

increase government spending and lower tax rates.

decrease government spending and raise tax rates.

decrease the money supply to raise interest rates.

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Question 101 pts

Full employment GDP is $2 trillion and the economy is currently producing $1.8 trillion.

The Keynesians would say to use expansionary fiscal policy.

The Keynesians would say to use contractionary fiscal and monetary policy.

The Keynesians would say to use contractionary monetary policy.

The Keynesians would say to use no policy; the economy will quickly correct itself

Answer 1

Question 91

Keynesian economists advocate intervention of government through fiscal policy in case of fluctuation in business cycle.

In specific terms, Keynesian economists suggests that during recession or when contractionary gap appears in the economy then government should resort to expansionary fiscal policy in terms of increasing government expenditure or spending and reducing taxes.

So, if the economy has a contractionary gap then according to the Keynesians, the government should increases government spending and lower tax rates.

Hence, the correct answer is the option (2) [increase government spending and lower tax rates].

Question 101

Full employment GDP is greater than the current GDP.

This implies that economy is in recession.

When economy is in recession, Keynesians prescribe administration of expansionary fiscal policy.

Hence, the correct answer is the option (1) [The Keynesians would say to use expansionary fiscal policy].