Question

1. "A portion of every income is spent creating another income from which a portion is spent again and so on." This statement is describing which of the following features of the Keynesian model?

		the savings investment equality
		the liquidity theory of the interest rate
		the multiplier effect
		the invisible hand

2.

For the Classicals, the remedy for the Great Depression would be?

		aggressive fiscal policy
		aggressive monetary policy
		aggressive fiscal and monetary policy
		wait for the long run

3.

Which of the following is the best expression for the equilibrium level of income in the Keynesian model?

		Y=C-I+GY

Answer 1

Ans 1. The multiplier effect

According to the multiplier effect, a multiplier is a factor of proportionality which measures the amount by which the endogenous variable changes in response to the change in any of the exogenous variables. This was one of the features of the Keynesian model.

Ans 2. Wait for the long run

Classical economists believed in the concept of laissez-faire. According to this concept, market will gradually come into an equilibrium when let free. There should be no need of government intervention in order to attain market equilibrium.

Ans 3. Y = C + I + G + NX