Question

True or False

1.Government spending can raise Aggregate Demand and real GDP in the Keynesian model.

2.Keynesians believe that monetary policy is very powerful at moving real GDP.

3.The Keynesians felt that the Great Depression was caused by inadequate demand partly coming from the stock market crash and partly from a lack of income growth for most people.

4.Contractionary gaps are more common than expansionary ones in the Keynesian model.

Answer 1

Answer 1. True. Aggregate demand has many components among which one is Government spending so if Government spending increases Aggregate demand increases. Also Government spending acts as a fiscal multiplier and can fuel growth thus aggregate demand can increase.

Answer 2. True. As monetary policy affects the inflation, interest rate etc thus the real gdp also gets affected if the inflation rate is altered.

Answer 3. True. When the stock markets crashed the assets were sold off in panic and this led to fall in proces of goods and services ie., deflation. Which later led to unemployment because demand for goods were very low.

Answer 4. True. The major reason behind is because the demand for goods cannot be very high or more than the economy’s potential output for long but thenopposite can be true fornlong ie., contrationary gaps can be common.