What is the Keynesian view on the cause of the cyclical swings in economic activity and the appropriate policy response to maintain full employment? Illustrate your answer with Keynesian PAE model.
The Keynesian view on the cause of cyclical swings in economic activities can be linked with one of the four sectors of the economy -
1. Private Consumption (C)
2. Private Investment (I)
3. Government Spending (G)
4. Net Exports (X-M)
Y = C + I + G + X-M, where C + I + G + X-M is the Planned Aggregate
Expenditure in the economy. Suppose investment demand in economy
declines. As can be seen, in the below diagram, after a decline in
investment spending the planned aggregate expenditure curve
declines from AE1 to AE2. This decline can be traced back to
investment spending in the economy.
An appropriate policy response can be -
1. Increase government spending or give tax breaks so that a
decline in investment spending can be countered by another form of
spending.
2. Decrease interest rate so that there would be an increase in
overall investment and consumer spending in the economy.
What is the Keynesian view on the cause of the cyclical swings in economic activity and the appropriate policy response...
The Keynesian view of the appropriate operating procedures and goals of monetary policy is that: A.The Federal Reserve should target the growth of a monetary aggregate with the primary goal being full employment and high growth, and a secondary goal of price stability. B.The Federal Reserve should target both the growth of a monetary aggregate and the level of interest rates with the primary goal being full employment and high economic growth, and a secondary goal of price stability. C.The...
1. To stimulate economic activity during a severe recession, the strongest appropriate fiscal policy is: a. an increase in taxes and/or an increase in government spending b. an increase in taxes and/or a decrease in government spending c. a decrease in taxes and/or an increase in government spending d. a decrease in taxes and/or a decrease in government spending e. a decrease in government purchases and/or a decrease in transfer payments 2. An increase in income tax rates: a. makes...
3. From a Keynesian point of view, which is more likely to cause a recession: aggregate demand or aggregate supply, and why? In your answer explain the difference between Keynes law and Say's law. 4. Why do sticky wages and prices increase the impact of an economic downturn on unemployment and recession?
[8] In Keynesian economics the most important factor determining whether the level of economic activity is growing or shrinking is: A) the multiplier effect. B) government expenditure and tax policies. C) the behavior of nonincome-determined spending. D) the relationship between leakages from and injections into the spending stream. [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....
Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below. For each of the situations below, sketch an AD-AS diagram using the vertical potential GDP, aggregate demand, and aggregate supply curves to illustrate your answer on (1) and shows what happen to the price level, employment level, and output gap. a. A recession. The economy is in the flat aggregate supply zone. b. A stock market collapse that hurts...
1. What were the cause(s) of the long-run aggregate supply shift during the Great Recession? What were the cause(s) of the aggregate demand shift during the Great Recession? 6. Consider the following statements about the macroeconomy. For each, indicate whether the statement best distinguishes the strict Keynesian view, strict classical view, or neither of these views a. All prices are completely flexible. b. The primary focus is on aggregate supply. c. Spending is the key determinant of output. d. Capital...
1. To stimulate economic activity during a severe recession, the strongest appropriate fiscal policy is: a. an increase in taxes and/or an increase in government spending b. an increase in taxes and/or a decrease in government spending! c. a decrease in taxes and/or an increase in government spending d. a decrease in taxes and/or a decrease in government spending e. a decrease in government purchases and/or a decrease in transfer payments 2. An increase in income tax rates: a. makes...
1.The maintenance of general economic stability relies most heavily on: A. Federal fiscal policy B. Coordinated state and local fiscal policies C. Tax and revenue policies of state governments D. Federal aid to the states 2.If we passed a constitutional amendment requiring a balanced budget every year, this would probably A. prevent recessions. B. make our recessions into depressions. C. create inflations. D. raise interest rates. 3.If the President says he will request higher taxes if price increases accelerate, the...
Mailings Review View AvvA AaBbCcDdE Emphasis AaBb CcD ABCDdE Heading Normal Due: SSE 104 HW4 Name of student: Staple any extra answer sheets with this question sheet. Topic: Aggregate Demand Describe the effects of each of the following events on the US economy (i.e. What may happen to the price? To the real output?). Explain briefly what cause these effects (i.e. What happens to determinants of AD or AS or both? Why?) Illustrate your answers in given AD-AS diagrams. Label...
In response to concerns about a future recession, the government decides to give consumers a tax rebate (this is the same as a tax decrease). Answer the following using the graphical IS-LM model. a. Draw a graph illustrating the impact of the tax decrease on equilibrium output and the interest rate. b. Now suppose that the central bank does not believe that a recession is looming and determines that it would like to maintain Y at the pre-rebate level. What...