Question

Which of the following propositions best sums up the core of ‘Keynesian’ economics?

	a.	Fiscal austerity is required in recessions
	b.	In the short-run, output depends on the level of aggregate demand.
	c.	Consumption does not depend on income
	d.	Supply creates its own demand

The rate of interest that you are paying on a mortgage loan is 6.5 per cent per year. Inflation is running at 3 per cent per year. The real rate of interest that you are paying is therefore:

	a.	0.5 percent
	b.	6 percent
	c.	3.5 percent
	d.	9 percent

Answer 1

Answer Option B) In the short run , output depends on the level of aggregate demand.

Keynes was belief in the short time period. According to him, Great depression of 1930 was the result of less aggregate demand. In the short run , income , output and employment can be increased with increase in aggregate demand.

Answer Option C) 3.5 Percent

Solution

Real interest rate= Nominal interest rate- inflation

Nominal interest rate= 6.5%

Inflation = 3%

Real interest rate= Nominal interest rate- inflation

Real interest rate= 6.5-3

Real interest rate=3.5%