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d.output will tend to remain below full-employment capacity unless aggregate expenditures increase.

9.Which of the following is an important insight of Keynesian analysis?

a.Changes in output, as well as changes in prices, play a role in the macroeconomic adjustment process.

b.When widespread unemployment is present, increases in aggregate demand will exert a larger impact on real output than when the economy is operating at or near full employment.

c.Policies that effectively stabilize aggregate demand—that minimize abrupt changes in demand—will substantially reduce economic instability.

d.All of the above are correct.

e.None of the above are correct.

10.What is the major source of economic instability according to the Keynesian view of the business cycle?

a.errors made by policymakers

b.wide fluctuations in private investment

c.wide fluctuations in private consumption

d.wide fluctuations in imports relative to exports

Answer Key 1 through 10

1. (b), 2. (a), 3. (b), 4. (b), 5. (a), 6. (b), 7. (b), 8. (d), 9. (d), 10. (b)

Chapter 12

Fiscal Policy

1.When government expenditures exceed revenue from all sources,

a.a budget deficit is present.

b.the supply of money will increase.

c.the government’s outstanding debt will decline.

d.all of the above are true.

2.According to the Keynesian view, which of the following would most likely decrease aggregate demand?

a.a decrease in tax rates

b.a decrease in government expenditures

c.an increase in transfer payments

d.an increase in the budget deficit

3.Automatic stabilizers are government programs that tend to

a.increase the ups and downs in aggregate demand without legislative action.

b.bring expenditures and revenues automatically into balance without legislative action.

c.shift the budget toward a deficit when the economy slows but shift it toward a surplus during an expansion.

d.increase tax collections automatically during a recession.

4.Keynesian analysis implies that a planned expansion in the size of the budget deficit is

a.always necessary to ensure full employment.

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