Question

1.In the Keynesian model, the fallacy of composition suggests that behavior at the micro level does not necessarily hold at the macro level because:

a.of all of the answers in this question.

b.price adjustment in the Keynesian model is slow due to sticky prices and wages.

c.belt tightening by individuals in the macro economy may cause GDP declines if the saved money is not loaned out in a weak economy.

d.one person's spending is another person's income and linked together at the macro level.

e.while the classical model assumes that all savings is loaned out and becomes investment, the Keynesian model allows for savings to remain idle.

2.Modern macroeconomic models:

a.tend to be theoretically rigorous.

b.are usually internally consistent.

c.all of the answers in this question.

d.are extremely complex.

e.sometimes produce unrealistic outcomes that defy human behavior.

3.Expansionary fiscal policy:

a.decreasing the money supply and raising interest rates.

b.increasing the money supply and lowering interest rates.

c.decreasing government spending and/or raising taxes.

d.increasing government spending and/or cutting taxes.

4.Regardless of the starting point in modern macroeconomic models, through the adjustment process the economy will ultimately:

a.will always be below potential GDP.

b.will ultimately return to potential GDP.

c.remain in its current point either above, below, or at potential GDP.

d.will eventually exceed potential GDP.

5.Expansionary monetary policy:

a.decreasing government spending and/or raising taxes.

b.decreasing the money supply and raising interest rates.

c.increasing government spending and/or cutting taxes.

d.increasing the money supply and lowering interest rates.

Answer 1

1. Option C is correct

In Keynesian model the fallacy suggests that behavior at micro Level does not necessarily hold at the macro level because the belt tightening by individuals in the macro economy may cause GDP decline if the saved money is not loaned out in a weak economy.

2. Option C is correct

Modern macroeconomic model has all the given characteristics

3. Option D is correct

Expansionary fiscal policy increases government spending and/ or cut taxes

4. Option D is correct

The economy will eventually exceed potential GDP

5. Option D is correct

Expansionary monetary policy increases the money supply and lowers the interest rates