Question

[9] Using the Keynesian approach, if leakages from the spending stream are less than injections, the current level of output is: A) less than the equilibrium level of output, and will increase. B) less than the equilibrium level of output, and will decrease. C) greater than the equilibrium level of output, and will increase. D) greater than the equilibrium level of output, and will decrease.

[10] Using the Keynesian approach, if leakages from the spending stream are less than injections into the spending stream, total spending will be: A) less than total output, and total output will decrease. B) less than total output, and total spending will increase. C) greater than total output, and total output will increase. D) greater than total output, and total spending will decrease.

[11] A primary assumption of new classical economics is: A) wages and prices are not flexible. B) an upward sloping aggregate demand curve. C) over the long run the economy will operate at the natural rate of unemployment. D) all of these answers are correct.

[12] According to new classical economics, the wealth effect, the interest rate effect, and the foreign trade effect: A) keep the economy from operating at full employment. B) cause the aggregate supply curve to be upward sloping. C) cause the aggregate demand curve to be downward sloping. D) none of these answers are correct.

[13] In the new classical model, the aggregate supply curve is: A) upward sloping in both the short run and the long run. B) perfectly vertical at the natural rate of unemployment in both the short run and the long run. C) upward sloping in the short run and perfectly vertical at the natural rate of unemployment in the long run. D) perfectly vertical at the natural rate of unemployment in the short run and upward sloping in the long run.

[14] A primary conclusion of new classical economics is: A) wages and prices are inflexible downward. B) there is no short run tradeoff between unemployment and inflation. C) a free market economy can operate at less than full employment for long periods of time. D) government intervention in the economy will be rendered ineffective by the responses of businesses and households to these policies.

[15] According to the rational expectations approach, an announcement that interest rates may be raised to curb inflation would likely cause businesses and households to: A) put political pressure on officials to cancel the planned interest rate changes. B) go along with the policy knowing that it is in their best interest to curb inflation. C) immediately borrow and increase their spending to beat the rise in the interest rates. D) reduce borrowing and depend more on the expenditure of saved income and earnings.

Answer 1

9. C) GREATER than the equilibrium level of output, and will increase.

Leakages are savings, tax and import which won't come under a circular flow of money. These will take some money out of the market. Aggregate demand decreases.

Injections are the investment, government expenditure and export. These will inject money into the market. Aggregate demand increases.

If leakages are less than injection, more goods will be made. The output will be more than equilibrium and it will start to decrease when people are demanding less of the products.

10. C) greater than total output, and total output will increase.

When leakages are less than injection, total spending will be increasing. When new investments are injected then spending will be more than that of available output. With the help of injection, now the economy can produce more output than before. Real GDP increases.

11.C) over the long run the economy will operate at the natural rate of unemployment.

According to the classical economists, wage and prices are flexible. They can fluctuate. Aggregate demand curve is a downward sloping curve as people demand more loans when interest rate is low, export will happen more when price is low and people will acquire more wealth when its price is low. So option c is the answer