Question 1

Prior to the general acceptance of the Keynesian Model, economists used a loosely compiled set of theories to forecast and analyze the economy that today's economists refer to as the:

1. Anachronistic Model
2. Classical Model
3. Monetarist Model
4. Marxian Model

Question 2

According to the Keynesian Model:

1. The government should adopt a laissez-faire approach when responding to fluctuations in the business cycle.
2. The government should run a budgetary deficit to fight inflation by slowing the economy doen.
3. The government should be involved in smoothing out the business cycle to lessen the impact of inflationary and recessionary gaps
4. The government should possess and control the means of production in order to control the economy and eliminate fluctuations in the business cycle.

Question 3

Which of the following, according to the classical economists, would NOT be an appropriate function for government:

1. Define and defend property rights
2. Smooth out the business cycle
3. Reallocate resources to correct for the effects of externalities
4. Provide public goods

Question 4

Which of the following is generally true about the Keynesian model?

1. It failed to explain the simultaneous existence of inflation and unemployment in the late 1970's and early 80's.
2. Even though it did provide some useful insights into the workings of the economy, that are still the basis of macroeconomic analysis, it is a bit outdated and a little less relevant as was from 1940 - 1975.
3. The Keynesian model did not account for the fact that it, in essence, sanctified the existence of budgetary deficits which politicians used as a political rather than an economic tool -- thus leading to persistent budgetary deficits.
4. all of the above are true.

Question 5

Keynes did not disagree with the classical economists' notion that, if left alone, the economy would eventually self-correct inflationary and recessionary gaps. However, this would take more time that the classical economists had believed. That's because prices are sticky. Some markets are not competitive enough for prices to immediately fluctuate to reflect changes in supply and demand. Additionally, labor unions would prevent wage rates from falling, even if there were a surplus of workers in the labor market. However, government intervention is desirable to hasten the closing of inflationary and recessionary gaps because in the long run we're all dead.

1. True
2. False