Question

In our balloon analogy, a hole in the balloon represents.:

	a.	the thickness of the skin.
	b.	financial crisis.
	c.	fiscal policy.
	d.	a hole in the balloon.

Keynesian (original school) economists argue:

	a.	velocity is unstable.
	b.	all of the answers are true.
	c.	monetary policy is a weak policy tool.
	d.	monetary policy can influence real output in the long-run.

Keynesian economists believe that consumers have money illusion, that is:

	a.	they act on changes in nominal variables instead of real variables.
	b.	they act on changes in real variables instead of nominal variables.
	c.	they suffer from the illusion that they will be rich.
	d.	they are fooled by the central bank.

The cure for hyperinflation is:

	a.	reducing money growth.
	b.	maintaining government spending.
	c.	lower taxes.
	d.	seignorage.
	e.	All of these answers are correct.

Answer 1

Part 1) A hole in the balloon represents financial crisis.

Part 2) Keynesian economists argue the following

1. Velocity of money is unstable. It is the classical economists who assume it to be constant.
2. Monetary policy is a weak policy tool, as the fiscal policy is the main instrument to handle the economy.
3. Monetary policy can influence real output in the long-run.

Part 3) Keynesian economists believe that consumers have money illusion, that is they act on changes in nominal variables instead of real variables.

Part 4) The cure for hyperinflation is reducing money growth. This is because maintaining government spending and lowering taxes will raise the aggregate demand which will further fuel inflation. On the other hand, seignorage means printing of more money. This further raises the level of inflation in the economy.